Public bank mortgage rates become attractive

From July 1, 2020, the State Bank of India offers home loans starting at 6.95%. This will be the second lowest rate for home loans after Bank of Baroda, which offers home loans starting at 6.85%.

In the second week of June, the country’s largest bank announced a cut in its external benchmark linked lending rate to 6.65% from 7.05%. The bank had also reduced the marginal cost of the Fund-Based Lending Rate (MCLR) to 7% from 7.25%.

Interest rates on home loans have been falling since the Reserve Bank of India (RBI) began cutting key rates to revive the economy which has taken a hit due to the foreclosure. At its last monetary policy meeting, the central bank cut the repo rate by 40 basis points (bps) to 4% and cut the repo rates by 40 basis points to 3.35% . A basis point is one hundredth of a percentage point.

Following the cuts in key rates, the rates for new mortgage customers have fallen. “The sub-7% is the lowest interest rate on floating home loans over the past two decades,” said Gaurav Gupta, CEO of Myloancare, a marketplace for loans and credit cards.

Even though SBI rates start at 6.95%, actual rates vary depending on the loan amount and the borrower’s profile. For employees, the interest rate is 7% for loans up to ??30 lakh. For loans between ??30 lakh and ??75 lakh, the rate is 7.25% and 7.35% for higher loans ??75 lakh. Female salaried borrowers with high credit scores get 6.95% home loans.

The mortgage segment is very competitive. In the past, the interest rates of private and government lenders were similar. But since the lockdown began, private lenders have not been aggressive as transactions are slow, intermediaries say.

For employees, ICICI Bank mortgage loans start at 7.45% (up to ??35 lakh) and go up to 8.45% (for loans over ??75 lakh). HDFC Ltd home loan interest rates start at 7.35%.

Eligibility and IME

Lower rates from public sector banks mean lower Equivalent Monthly Payments (EMIs) or increased eligibility. Suppose a borrower takes ??25 lakh loan from SBI for 20 years. A private lender charges 50 basis points more. The IME for the SBI loan at the rate of 6.95% will be ??19,308, and from the private lender, it would be ??20 064. The borrower will also end up paying ??1.81 lakh more in interest for a loan from a private lender.

A lower interest rate also means higher eligibility for the borrower. A person who wins ??45,000 income would be eligible for a loan of ??25.23 lakh at an interest rate of 7.45%. If the interest rate drops by 50 basis points, the person’s eligibility could increase by almost ??1 lakh. However, the eligibility criteria differ from one credit institution to another, and many other factors determine it. This is just an illustration to show how the eligibility can change if everything else is the same.

However, do not choose a lender based on the interest rate alone. There is a greater scope for negotiation with private lenders. They could also disburse the loan faster than public sector banks.

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