Synopsis
The Reserve Bank of India has cut the repo rate by 25 basis points, benefitting home loan borrowers significantly. This change affects interest payments, potentially leading to substantial savings.Key Takeaways
- RBI cuts repo rate by 25 basis points.
- Borrowers with floating rate loans will benefit.
- Refinancing options available for older loans.
- Lower interest rates decrease overall loan costs.
- Loan tenures can be reduced, enhancing savings.
New Delhi, Feb 8 (NationPress) The Reserve Bank of India (RBI) has declared a 25 basis points cut in the repo rate, providing significant relief for borrowers, particularly those with home loans.
All retail floating rate loans issued post October 1, 2019, are tied to an external benchmark—the repo rate. Hence, when the central bank lowers the repo rate, banks must automatically pass on this benefit to their clients.
To facilitate this adjustment, banks are required to reset the interest rates on a quarterly basis.
If your home loan was acquired prior to October 1, 2019, and is linked to the Marginal Cost of Funds Based Lending Rate (MCLR), then refinancing your home loan could be a wise move to benefit from the lowered repo rate.
As the repo rate decreases, the interest rates on all loan types associated with it also drop, leading to reduced interest payments for borrowers.
Typically, when the RBI reduces the repo rate, most banks do not lower your EMI but instead offer the benefit of a decreased interest rate by shortening the loan tenure.
For instance, if a borrower secures a home loan of Rs 75 lakh at an interest rate of 9 percent for 20 years, and after 36 months the rate drops to 8.75 percent, the borrower will now pay Rs 1.57 crore in interest over 17 years instead of Rs 1.62 crore. This equates to a saving of Rs 4.97 lakh and an earlier loan closure by seven months.
Additionally, if the interest rate is lowered after 24 months, the borrower stands to save Rs 5.8 lakh (comparing Rs 1.56 crore to Rs 1.62 crore) in interest payments and can conclude the loan eight months sooner.
