Most home buyers, irrespective of how much they earn, feel
the pinch when they have to shell out money every month to pay for EMIs on Home
Loans. Any drop in the EMI amount would bring cheer to existing and new Home
Loan borrowers.
With the Reserve Bank of India cutting repo rates by 25 basis
points from 6.5% to 6.25%, which is the lowest in six years, loan borrowers are
hopeful about a decline in interest rates, which would translate into a
reduction in EMI amounts.
Additional Reading: 6 Common Mistakes Made By First-Time Home
Buyers
The relation between repo rates and loan EMIs
Repo rate is the rate at which the Reserve Bank of India
lends money to commercial banks. As a lower repo rate would mean paying less to
the RBI for the banks, it would mean paying back loans at a lower interest rate
for the borrowers. The fall in interest rate would see the number of borrowers
go up, thereby, increasing profits for the banks?
However, a repo rate cut does not always lead to a decline in
interest rates. Only if the banks reduce the base lending rate, the loan EMI
comes down. Also, the banks need to check if they are able to have enough
margins by compensating for loan defaults and NPAs before passing on the
benefits to borrowers.
Current Home Loan rates and interest rates once banks pass on
rate cut benefits
Will a mere 0.25% decline result in adequate savings?
A 0.25% decline in interest rate may appear too small to make
a substantial difference in a short period of time, but it could help you save
in the long run.
For example, if you have a Home Loan of Rs. 50 lakh to be
paid back over a tenure of 20 years with an interest rate of 9.5%, your loan
EMI would come down to Rs. 46,607 with a total payable interest of Rs.
61,85,574. So, at the end of the loan tenure, you would end up paying a total
amount of Rs. 1, 11, 85,574 including principal and interest.
If your bank cuts down the interest rate to 9.25%, the loan
EMI would be down to Rs. 45,793, translating to a total payable amount of Rs. 1,
09, 90,402 at the end of the loan tenure.
Thus, you would end up saving up to Rs. 1.95 lakh on the
total payment of your Home Loan.
Drop in repo rate: Ideal time to consider home loan
refinance?
If you’re not happy with the rates being offered by your
current financer on your Housing Finance,
you have the option of moving to the MCLR regime within the same bank or to an
MCLR-linked loan at another bank. Even a 0.25% difference between the two
interest rates could potentially save you lakhs of rupees in the long run.
All you need to do is pay a processing fee along with a legal
fee to your new lender which amounts to a small percent of your due loan
amount.
Additional Reading: When Is Home Loan Refinancing A Good
Idea?
If your Home Loan is nearing completion, the rate cut would
not impact you much. So, if you have an existing loan, do keep an eye on the
total interest saved either by reducing the tenure or EMI or moving your loan
to another bank.
[Source: https://blog.bankbazaar.com/how-cheaper-can-your-loan-get-after-the-repo-rate-cut/]
