After bank rate cut, those with higher EMIs may choose to shift

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With the Reserve Bank of India (RBI) cutting the repo rate for the third time, a total of 75 basis points (bps) in this calendar year, customers can expect some easing of equated monthly instalments (EMIs). And some banks have already started cutting their base rate.

The country's largest bank, State Bank of India, has cut its base rate for the second time during this year. Now, its base rate stands at 9.7 per cent. United Bank has also done so. Others like Allahabad Bank (30 bps), Punjab National Bank and Dena Bank (25 bps each) have also reacted positively.

A cut in banks' base rates translates into an automatic reduction in all floating loans linked to them. For example, for existing borrowers, the EMIs will fall like this: If you had taken a loan of Rs 50 lakh for 15 years at 10.5 per cent in December 2014, the EMI would have been Rs 55,270. If the bank is offering a new rate of 10 per cent after six months, the new EMI would come down to Rs 53,766 on the new principal of Rs 4,929,351 - a reduction of Rs 1,504 per month. Even for a new customer, things will be more attractive. The EMI for the same loan of the same tenure last year would have been Rs 55,270, now, it would be Rs 52,971 - a saving of Rs 2,299.

There will be overall saving of interest outgo as well. For the loan at 10.5 per cent interest rate, the total interest payout would be Rs 4,878,668. For a loan at 10 per cent interest, the interest payout will be Rs 46,05,439 - a saving of Rs 2.73 lakh. Over a 15-year period, it is a saving of Rs 18,000 a year.

Another benefit for potential home loan borrowers is the increase in their loan eligibility. In other words, at a lower interest rate, borrowers can avail of a higher loan amount and thereby reduce their downpayment. Gaurav Gupta, of, says the average increase in loan eligibility with a 25 bps cut 1-2 per cent. For existing borrowers, it is advisable to keep the EMI constant and reduce the tenure of the loan, when interest rates fall. This will reduce the overall interest rate outgo.

In addition, if you are stuck with a loan with a higher interest rate and there is still a long time to go, it could make sense to shift lenders because there is no pre-payment penalty in case of floating rates. However, for those completing the loan in the next few months, it might not make much sense because most of the interest outgo would have already happened. For example, for a similar loan taken at the rate of 10.5 per cent, if there are only six months left, the saving will be just Rs 13,007.

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