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New home loan takers to gain instantly from RBI cut

NEW DELHI: New home loan borrowers are set to immediately gain from the latest round of rate reduction by RBI but existing borrowers can get the benefit of repo-linked rates by paying legal and administrative charges, which has been waived by certain banks but others are charging as much as Rs 10,000.

On an average, home loan rates are likely to fall by 25 basis points for new borrowers, and the gain can be higher for those who have not migrated so far from marginal cost of lending (MCLR) -linked loans to those linked to RBI’s repo rate and doing so now.

To take the benefit of the new system, existing borrowers, whose interest rates are pegged to the bank’s MCLR, will have to migrate to the new system. For this, banks are charging legal and administrative charges, which varies from nil to half a percent of the outstanding amount, subject to a cap of Rs 10,000.

Deputy MD of SBI Prashant Kumar said RBI has barred banks from levying any migration fee. But the regulator has allowed lenders to levy legal and administrative fee. SBI is likely to levy a flat charge of Rs 5000 on borrowers who opt for conversion of their loans. ICICI bank has decided to waive the levy. Virendra Sethi, head of mortgage and retail asset of Bank of Baroda said his bank will charge only Rs 2,500.

However, this will be one-way traffic. A borrower can migrate from existing MCLR-based home loan rate to repo rate-based rate, but she cannot reverse the path as the old system will cease to exist.

Linking the home loan rate to a external benchmark rate would bring transparency in the system. Earlier, even if interest rates fell, banks did not pass on the benefit to the existing customer. But now, as interest rate is linked to repo rate, any cut in latter will lead to fall in interest rate.

In the new system, banks will levy a spread over repo rate. Besides this, bank also levy risk premium, which depends on the risk associated with a customer.

SBI has decided to levy a spread of 2.65% over repo rate to all customers and over and above that their would be risk premium varying from 15 to 50 basis points.

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