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

RBI kept the repo rate steady at 6.5 percent.

Home loan interest rates and equated monthly installments (EMIs) will remain unchanged for borrowers as the Reserve Bank of India (RBI) on June 7 decided to hold the repo rate steady at 6.5 percent for the eighth time in a row.

Since October 1, 2019, banks have linked all retail 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

Several economists expect the RBI to start reducing rates only in the latter half of FY 2024-25, i.e. after inflation cools down to a level within the RBI's comfort zone. So, existing borrowers will have to contend with higher interest rates for some more months.

"Since the repo rate directly influences lending rates, an unchanged rate means existing loans remain benchmarked to an elevated repo rate at 6.50 with the possibility of new loans being offered with lower spreads than older loans," says Adhil Shetty, CEO, Bankbazaar.com. Any rate cut in future would lead to lower rates, hence lowering the EMIs that loan borrowers have to pay, he added.

Inflation continues to remain above the RBI's four-percent target. India’s consumer price index (CPI) based inflation eased to a 11-month low of 4.83 percent in April from 4.85 percent in March, but food inflation remains a concern and continues to remain high at 8.7 percent. "At this stage, the RBI has wisely decided not to lower its guard but to continue working towards ensuring that inflation aligns durably and sustainably with its target," says Shetty.

Around 2021 and 2022, the lowest rates in the market were hovering around 6.5 percent, when the repo rate was four 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.

For financial planners, stable rates mean more accurate projections and advice. "Consumers benefit from predictable borrowing costs, which increases their ability to make informed decisions and plan for long-term financial goals such as home ownership," says Krishan Mishra, CEO, FPSB India.

New borrowers must scout for loans with narrowest spreads

This year, HDFC bank has effectively increased home loan rates for new borrowers by 40 basis points (bps) 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 8.75 percent.

According to data on interest rates compiled by Paisabazaar, the State Bank of India (SBI) and Bank of India have also raised their effective new home loan rates by 10 bps. In April, the lowest home loan rates at SBI and Bank of India for a Rs 50-lakh loan were 8.40 percent and 8.30 percent respectively. From May, these rates went up to 8.50 percent at SBI and 8.40 percent at Bank of India.

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 look for banks offering loans with the narrowest possible spread as this will reduce their overall interest outgo. They should also be cautious. "The unchanged repo rate, while beneficial in the short term, does not signal lower interest rates in the near future," says Atul Monga, CEO and Co-Founder, Basic Home loan. Banks are likely to maintain their current lending rates, keeping home loans costlier compared to pre-pandemic levels. This situation might particularly impact first-time home buyers and those seeking affordable housing, as they are more sensitive to interest rate fluctuations, he added.

Prepay to lower interest burden

You could also consider making part-prepayment out of your savings and investments. Just an extra few thousand rupees 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, particularly for borrowers whose home loans are linked to older benchmarks such as marginal cost of funds-based lending rate (MCLR) and base rate. In such cases, interest rates may be marginally higher compared to the repo-benchmarked loans in the market at present.

You can switch to lower rates offered by your own bank or housing finance company (HFC). It’s a simple and low-cost exercise that can potentially save lakhs in interest outgo. "It is customary for borrowers to keep checking on offers from competing lenders to reduce the overall incidence of interest on their home loan and offering option to their current lender to match the market rates which eventually leads to reduction of interest and consequently reduction of the overall loan tenor," says Vipul Patel, founder of MortgageWorld, a loan consulting firm.