Home loan borrowers have a big reason to cheer! The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points – the second time in this calendar year. The repo rate now stands at 6%, down from 6.5% at the start of this year.
How does the repo rate impact loan borrowers? The logic is simple – repo rate is the rate at which the RBI lends money to the banks. When the cost of borrowing comes down for banks, the aim of the central bank is that it would be passed on to the loan borrowers in the form of lower lending rates. So a 50 basis points repo rate cut should ideally mean that the interest rate on your loans would come down by half a percentage point.
However, the actual transmission of rate cuts works with a lag, and it usually takes a few months for loan borrowers to see a benefit in the form of lower EMIs
Repo rate cut: What will be the impact on your EMI?
Adhil Shetty, CEO, BankBazaar.com notes that home loan rates are about to go sub-eight again with today’s 25 basis points rate cut. The lowest rates we’re currently seeing are between 8.10 and 8.35, he says.
So how much money will you save?
- As per calculations in the table above, if the interest rate comes down from 8.5% to 8% (two consecutive repo rate cuts of 25 bps each), for a loan of Rs 10 lakh, the EMI savings would be Rs 314, and the total interest savings would be Rs 75,320/-
- For a Rs 50 lakh loan the EMI savings would be around Rs 2,354 and the total interest savings would be Rs 564,897/-
Source: BASIC Home Loan
However, Shetty points out that the lowest rates are typically reserved for prime borrowers (credit score > 750) and refinance cases.
“Homeowners paying a substantially higher rate (50 bps or higher above prevalent rates) are advised to refinance their loans to avail lower rates. Do note that automatic, immediate and full rate cuts are available only on repo-linked home loans offered by banks,” he says.
“Despite six years of repo-linking, we see that only 50% of floating rate loans with government banks are still linked to the MCLR and 2% to Base Rate. Borrowers with these banks are advised to take stock of their older loan benchmark and consider a refinance to a repo-linked home loan if it helps them save interest outflows,” he adds.
Atul Monga – CEO & Co-Founder, BASIC Home Loan says that the actual benefit to consumers will depend on how quickly financial institutions pass on these rate cuts. “It’s crucial for banks to transmit these benefits promptly to ensure that the intended economic stimulation reaches the end-users effectively,” he says.
Home Loan EMIs: Important Points to Note
- Santosh Agarwal, CEO, Paisabazaar points out that the transmission of this repo rate cut would be faster in case of floating rate loans linked to repo rate. However, the exact date of transmission of rate cuts to the existing borrowers would depend on the reset dates of their interest rates set by their respective lenders. Till then, they will continue to repay their loans as per the existing rates.
- In case of loans linked to MCLR or other internal benchmarks, transmission may take longer as the cost of funds of the banks plays a major role in determining their internal benchmark rates.
- The reduction in the repo rate, backed by the favourable liquidity conditions in the banking sector, should help banks further reduce the rates of their FDs and other liability-side fund sources. This should result in quicker reduction of cost of funds for the banks and thereby, allow a more effective transmission of policy rate cuts in loans linked to internal benchmarks.
