RBI puts more money in your pocket! How much will your loan be low with repo rate cut? Explained
Home loan borrowers have a big reason for cheering! The Reserve Bank of India (RBI) has cut the repo rate 25 basis points – the second time in this calendar year. The repo rate is now 6% below 6.5% earlier this year.
How does the repo rate impact loans affect borrowers? The logic is simple – the repo rate is the rate on which RBI lends money to banks. When the cost of lending for banks decreases, the aim of the central bank is that it will be passed to borrowers in the form of low lending rates. So the cut in the 50 basis points repo rate must ideally means that the interest rate on your loan will be reduced by half a percentage point.
However, the actual transmission of rate cuts works with an interval, and usually it takes a few months to see lending borrowers as a low EMI.
Repo Rate Cut: What will be the effect on your EMI?
Adhil Shetty, CEO, Bankbazaar.com notes that home loan rates are going to sub-eight with today’s 25 basis points cut. The lowest rates we are currently looking at are between 8.10 and 8.35.
So how much money will you save?
- According to the calculation in the above table, if the interest rate falls below 8.5% to 8% (25 bps each consecutive repo rate), for a loan of Rs 10 lakh, EMI savings will be Rs 314, and the total interest savings will be Rs 75,320/-.
- EMI saving for loan of Rs 50 lakh will be around Rs 2,354 and total interest savings will be Rs 564,897/-
Source: Basic Home Loan
However, Shetty states that the lowest rates are usually reserved for prime borrowers (Credit Score> 750) and refinance cases.
He says, “It is advisable to the homeowners paying a high rate (50 bps or more prevalent rates) to refinance their loans to avail low rates. Note that automatic, immediate and full rate cuts are available only on repo-linked home loans introduced by banks,” they say.
“Despite the six-year repo-linking, we see only 50% floating rate loans with public sector banks are still connected to MCLR and 2% are connected to base rates. With these banks, borrowers are advised to take stock of their old loan benchmarks and consider a repro-linked home loan rehabilitation, if it helps them to save interest,” they said.
Atul Monga – CEO and co -founder, Basic Home Loan says that the real advantage to consumers will depend on how quickly the financial institutions pass on these rate cuts. “It is important for banks to immediately transmit these benefits to ensure that the intended economic stimulation reaches the end-users effectively,” they say.
Home Loan Ames: Important Points to Note
- Santosh Aggarwal, CEO, Paisabazar explains that the transmission of this repo rate cut will be faster in the case of floating rate loan connected to repo rate. However, existing borrowers will depend on the exact date of transmission of rate cuts on the reset dates of their interest rates set by their respective lenders. Till then, they will continue to repay their debt according to the current rates.
- In the case of loans associated with MCLR or other internal benchmarks, transmission may take longer because the cost of banks’ money plays a major role in determining their internal benchmark rates.
- Reduction in repo rate due to a condition of favorable liquidity in the banking sector, banks should help further reduce the rates of their FD and other liability fund sources. As a result, there should be a quick decrease in the cost of funds for banks and thus, allow more effective broadcasting of policy rate cuts in loans associated with internal benchmarks.
