RBI Cuts Repo Rate: Home Loan Borrowers Rejoice
The Reserve Bank of India (RBI) has announced a significant reduction in the repo rate by 25 basis points, marking the second cut this year. The new repo rate now stands at 6%, down from 6.5% at the beginning of the year. This move is expected to lower borrowing costs for banks, which could translate into reduced interest rates for home loan borrowers, although the benefits may take time to materialize.
Impact of Repo Rate Cut on Home Loan EMIs
Adhil Shetty, CEO of BankBazaar.com, highlights that the recent rate cut could bring home loan interest rates below 8% once again. Currently, the lowest rates range between 8.10% and 8.35%. Borrowers can expect to see a decrease in their Equated Monthly Installments (EMIs) as banks adjust their lending rates in response to the repo rate cut. For instance, if the interest rate on a home loan decreases from 8.5% to 8%, a borrower with a loan of ₹10 lakh could save approximately ₹314 in monthly EMIs, amounting to total interest savings of ₹75,320 over the loan’s tenure. Similarly, for a ₹50 lakh loan, the EMI savings could reach around ₹2,354, with total interest savings of ₹564,897.
Understanding the Transmission of Rate Cuts
The actual impact of the repo rate cut on borrowers may not be immediate. The transmission of these rate cuts can take several months, depending on the type of loan and the lender’s policies. Santosh Agarwal, CEO of Paisabazaar, notes that floating rate loans linked to the repo rate will likely see quicker adjustments. However, loans tied to the Marginal Cost of Funds based Lending Rate (MCLR) or other internal benchmarks may experience delays due to the banks’ cost of funds. Atul Monga, CEO and Co-Founder of BASIC Home Loan, emphasizes the importance of timely transmission of these benefits by financial institutions. He states that the effectiveness of the repo rate cut in stimulating the economy relies heavily on how quickly banks pass on the reduced rates to consumers.
Key Considerations for Home Loan Borrowers
Home loan borrowers should remain vigilant about the implications of the repo rate cut. While the reduction is a positive development, the actual benefits will depend on individual lenders’ responsiveness. Borrowers with older loans linked to MCLR or Base Rate may want to consider refinancing to a repo-linked home loan to take advantage of lower rates. Experts recommend that homeowners currently paying significantly higher rates—50 basis points or more above prevailing rates—should explore refinancing options. This strategy could lead to substantial savings in both EMIs and total interest paid over the life of the loan.
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