With RBI announcing another cut in its key policy rates, it is expected to benefit retail borrowers via a slashing down of interest rates across loan segments. As per a decision taken in a meeting held by the Monitory Policy Committee (MPC), it was decided that the repo rate be slashed by 40 basis points (100 basis points or bps = 1%). The rate cut brought down this benchmark rate to 4%.
As lenders decide upon their lending rates based on RBI’s repo rate, it is expected to significantly impact the existing interest rates applicable to various loan segments. Such rate cuts particularly impact long term loans, such as home loans.
Given that a borrower needs to repay these loans over an extended tenor, a reduction in housing loan interest rate would mean sizeable savings on outstanding repayment liability and consequent EMIs.
Check out some facts and figures that indicate the reduction in interest rates for home loans in India in the coming months.
The likeliness of housing loan rate reduction
Amidst the unprecedented economic slowdown and the consequent disruptions in the financial market, the repo rates at which RBI lends to commercial lenders saw subsequent cuts. The latest rate cut of RBI by 40 bps brought down the repo rate to 4% from 4.4%. Prior to that, the repo rate saw a remarkable rate cut of 75 bps in the month of March 2020.
As per an existing RBI directive, lenders are mandated to adjust their housing loan interest rates at least once in every 3 months to comply with the external benchmark regime of lending. Its incidence harbingers a lending rate cut by various financial institutions, thus impacting the borrowers directly.
As experts project housing loan rates to hit a 15-year low, it can particularly help borrowers save more as the economic crisis deepens, disrupting the regular flow of income.
They can save on home loans significantly on account of two variables
- Home loans are advances of big-ticket size, whereby reduced rates would mean interest accrual in a significantly lower amount.
- The repayment tenors for home loans also extend for a long duration and can be anywhere between 15 to 20 years or more. Thus, a reduced rate would mean low-interest payment, and thus a reduction is EMIs payable, making these home loans affordable for borrowers.
Also, the gravity of this economic slump forebodes further rate cuts, with RBI indicating it would take all necessary measures to revive the growth of the Indian economy. With the real estate sector holding a critical bearing, in most likelihood, the existing cuts would continue to be extended even after a subsequent recovery to push for growth via individual investments through home loans.
Thus, while it remains to be seen how home loans in India would grow in the coming months, the repo rate cuts stand to vouch for a nationwide slashing of lending rates in this segment.
Further savings with tax benefits
With the applicability of home loan interest tax benefits, these are among the few advances that come with a possibility for additional savings. Borrowers can thus typically manage their repayments with prudent financial management even is hard times.
While availing home loans at a time when possibilities of lowered interest rates remain high, you must, nevertheless, selecting a loan amount that keeps EMIs within repayable limits. You can utilise a home loan EMI calculator to decide on a suitable home loan amount and repayment tenor.