RBI Monetary Policy | RBI holds repo rate at 6.5%: No impact on home loan EMIs

The central bank has kept the rate unchanged at 6.5 percent for the seventh consecutive time.

Your home loan interest burden and equated monthly installments (EMI) will remain unchanged for now as the Reserve Bank of India (RBI) kept the repo rate steady at 6.5 percent for the seventh time in a row on April 5.

"This move aims to keep inflation in check within the targeted range while sustaining market momentum," says Adhil Shetty, CEO of BankBazaar.com. He adds, the central bank's strategy reflects careful consideration of robust economic indicators, amidst factors such as monsoon performance, US federal decisions, and overall economic growth, ensuring continued high growth prospects for the country.

Since October 1, 2019, banks have linked floating-rate retail loans to an external benchmark, which is the repo rate in most cases. So, any changes in the repo rate directly influence the interest rates on these loans.

Wait for lower rates continues

"A stable repo rate signals consistency in interest rates for borrowers, providing assurance to homebuyers regarding steady loan interest rates, beneficial for both new loans and existing ones with floating rates," says Shetty.

Existing borrowers will have to contend with higher interest rates for some more months, after which economists expect the inflation to cool to levels within the RBI's comfort zone, paving the way for reducing rates. Inflation continues to remain above the 4 percent target, RBI governor Shaktikanta Das said on April 5.

Around 2021 and 2022, the lowest rates in the market were around 6.5 percent, when the repo rate was 4 percent, implying a spread of 2.5 percent over the repo rate. Those borrowers have the option of switching to other lenders who offer narrower spread and lower interest rates to save on interest costs.

New borrowers must scout for narrowest possible spread

This year, HDFC bank has effectively increased home loan rates by 35 basis points (bps) for new borrowers despite repo rates being steady. One basis point is one-hundredth of a percentage point. At HDFC Bank, the lowest interest rate on a Rs 50 lakh home loan was 8.35 percent in January, whereas at present, the lowest rate is 8.70 percent.

According to data on interest rates compiled by Paisabazaar, Axis Bank and Karur Vysya Bank have also raised their effective new home loan rates by 5 bps. In January, the lowest home loan rates at Axis Bank and Karur Vysya Bank for a Rs 50-lakh loan were 8.70 percent and 8.95 percent. From March, these rates went up to 8.75 percent at Axis Bank and 9 percent at Karur Vysya Bank.

Financial experts have attributed this rate hike to liquidity issues, which have affected not only HDFC Bank, but others as well.

So, new home loan borrowers should scout for banks offering loans with the narrowest possible spread. This will reduce the interest payable.

“Home loan borrowers should assess their financial capabilities and explore opportunities to secure favorable loan terms amidst this rate environment,” says Atul Monga, CEO and Co-founder, Basic home loan.

Also read: When taking home loan, make sure your down payment is high enough

Prepay to lower interest burden

You could also consider making part-prepayment of the loan out of your savings and investments. Just an extra few thousand every month can reduce your interest payout significantly over the long term.

A good strategy is to earmark a portion of your annual bonus to prepay your housing loan every year.

Switch the lender

There are opportunities to switch lenders in the current scenario with several banks offering home loans starting around 8.5 percent.

This is important for borrowers with government banks where a large percentage of loans continue to be on older benchmarks such as marginal cost of funds based lending rate (MCLR) and base rate where interest rates may be marginally higher compared to the repo-benchmarked loans we have today.

Refinancing with one’s own bank is simple and low-cost but can potentially save lakhs for borrowers.