Home loan interest rates are set to come down once again, with Reserve Bank of India (RBI) governor Sanjay Malhotra on April 9 announcing the monetary policy committee’s decision to cut the repo rate by 25 basis points (bps). It now stands at 6 percent, down from 6.25 percent.
All floating-rate retail loans, including home loans, sanctioned after October 1, 2019, are linked to external benchmarks, which is the repo rate in the case of most banks. So, these lenders will have to transmit the entire 25-bps reduction to their existing home loan borrowers. Factoring in the 25-bps cut in February, the cumulative 50-bps reduction is bound to result in substantial savings for those who have availed of home loans.
Banks are required to review and reset their interest rates at least once every quarter, so existing borrowers will automatically get the benefit of the rate reduction, in line with their loan agreement.
Also read: RBI repo rate cut: Home loan rates dip, but new borrowers may miss full benefit
Reduce EMIs or shorten tenure?
When rates go up, banks are mandated by the RBI to give borrowers the option to choose between higher equated monthly instalments (EMIs), longer tenure, or a combination of both to adjust to the higher rates. In a falling rate scenario, banks tend to keep the EMI amount constant and, thus, shorten the loan tenure, unless you specifically insist on a reduction in the monthly outgo.
For example, say, you had taken a Rs 50-lakh home loan carrying an interest rate of 8.25 percent and a 20-year tenure just after the February repo rate cut. After the April 9 rate cut, your interest rate would go down to 8 percent. For the purpose of this example, if you choose to reduce the amount that you pay as your EMI, it will come down from Rs 42,603 to Rs 41,826, yielding savings of Rs 777 per month. Your interest savings in this scenario will amount to around Rs 1.85 lakh over the loan tenure.
On the other hand, if you were to retain the EMI at the same level, your tenure will shrink by 10 months. In this case, the interest saved would work out to a far heftier Rs 4.36 lakh. “About 95 percent of home loans in India are on floating rate. And in most of these cases, EMI remains the same during a rate cut and the tenure shrinks. It's better to have a tenure reduction instead of an EMI cut because this option provides higher interest savings. In our simulations, we see that this option provides up to 234 percent higher interest savings compared to EMI reduction,” said Adhil Shetty, CEO, Bankbazaar.com.
Also read: RBI monetary policy: Home loan borrowers set for lower interest payout, EMIs
Optimise repo rate reduction
In a falling rate scenario, you can also consider refinancing your loan. For instance, if the difference between the interest rate you are currently paying and those being offered by other lenders is over 35-50 basis points, you must look to switch.
Individuals are set for big tax savings this financial year, as the tax cuts announced in Budget 2025 take effect from April. Moreover, this is also the season for hikes and annual bonuses. You would do well to use some of these funds to reduce liabilities and scale up investments. “Home loan borrowers should look to reduce their interest burden. Even minor adjustments—like making a part-prepayment of Rs 50,000 or increasing your EMI by just Rs 5,000—can help you save lakhs,” said Vipul Patel, founder, Mortgageworld.in, a loan consultancy firm.
Finally, if you had taken a home loan prior to October 2019 and haven’t switched to an external benchmark-linked loan yet, you must do so now, without delay. Repo-linked loans offer greater transparency and complete transmission of RBI policy action compared to loans linked to marginal cost of funds-based lending rate or base rate.
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