RBI holds rates: Lower your EMI smartly with these steps to ease the home loan burden

For home loan borrowers, an RBI rate cut can result in a significant relief. On a Rs 50 lakh loan for 20 years, the drop from 8.5% to 7.5% translates into savings of around Rs 7.5 lakh.

On expected lines, the Reserve Bank of India (RBI) kept the repo rate unchanged on October 1, after a cumulative 100-basis point cut since the start of the year.

The benefits of the MPC's easing has reached home loan borrowers in the form of relief in EMIs. A 100 bps cut reduces the EMI on a Rs 1 lakh loan with a 20-year tenure by approximately Rs 65 per lakh, translating into savings of nearly Rs 1,625 and Rs 3,250 respectively on a loan of Rs 25 lakh and Rs 50 lakh.

If you are wondering how to slash those EMIs even more lower, there are a few options for you.

But first, the big question - Do you stick with your current bank or shift over to another lender with better home loan rates?

Renegotiate vs Refinance - What’s the Right Move?

You must nudge your existing lender for a lower home loan rate, called an “internal balance transfer”. This is the easiest path with less paperwork and no need for property valuation, making it quicker in terms of processing. However, there will be a switch fee, usually 0.25-0.5% of the outstanding loan amount, or sometimes a flat processing fee.

For even more savings, refinancing is another option, which means moving the entire loan balance to a new lender with better rates. However, with fresh documents, property checks, some additional fees may need to be paid up.

Which Path is Better?

If the rate difference is small, say 0.25–0.5%, it is usually not worth the hassle of switching lenders. If your bank agrees to a lower interest rate for a fair conversion fee, staying with the existing lender is always a better option, especially if you are in the later years of the loan, when most of the EMI goes into principal repayment.

However, in case of a bigger rate differential, say 0.75% or more, refinancing can help save up some serious money, especially during the early-to-mid-tenure of a home loan. In early years, the EMI mostly covers interest, and this move can save lakhs if you can ensure the net savings after switching cost are at least 15-20% more than staying with the lender.

Lower EMI or Shorter Tenure? 

Once you lock in a lower home loan rate, the next big decision is if one needs to lower the EMI to reduce monthly payout or keep EMIs unchanged and close the loan earlier?

Shrinking EMIs helps your cash flow, especially if you have other bills like kids’ education, or other loans.  However, keeping the EMI steady and reducing tenure can pay off the loan faster and save big on total interest.

For home loan borrowers, an RBI rate cut can result in a significant relief. On a Rs 50 lakh loan for 20 years, the drop from 8.5% to 7.5% translates into savings of around Rs 7.5 lakh. "If customers retain their earlier EMI levels, the savings can go up to Rs 15.4 lakh over the tenor. With banks maintaining their spreads and festive offers on processing fees and special rates, this is one of the best times in recent years to invest in a home," said Adhil Shetty, CEO, BankBazaar.com.

Combined with additional savings from the income tax relief announced in the Budget and lower GST on key goods and services, household purchasing power has improved which can give a further boost to borrowing.  "This creates a strong environment for credit demand to rise. As we move into the festive season, we expect to see a significant boost in borrowing across categories - ranging from consumer loans to housing finance - driven by improved affordability, policy support, and stronger consumer sentiment," said Raoul Kapoor, Co CEO, Andromeda Sales and Distribution.