The Reserve Bank of India (RBI) has kept the repo rate steady at 6.5 percent for the ninth time in a row in its Monetary Policy Committee (MPC) review on August 8. With the status quo, the home loan interest rates and equated monthly instalments (EMIs) remain unchanged for borrowers.
"The RBI's decision to keep the repo rate unchanged carries significant implications for the home loan market," says Atul Monga, CEO and Co-Founder, Basic Home loan. Following the budget, the Monetary Policy Committee's (MPC) announcement has provided much-needed stability, offering relief to homeowners, he added. The steady rates reflect a positive sentiment in the real estate and lending sectors, presenting an opportunity for lenders to boost their credit outflow to homebuyers.
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Since October 1, 2019, banks have linked floating-rate retail loans to an external benchmark, which is the repo rate in most cases. Hence, any change in the repo rate directly influences the interest rates on those loans.
Higher Rates May Continue for Some More Months
Several economists expect the MPC to change its stance to Neutral in October, and start the rate cutting cycle from December, if the ffood inflation moderates to a level within RBI's comfort zone. Existing borrowers will have to contend with higher interest rates for a few more months.
August RBI MPC - Top highlights you can't miss
Inflation dipped to a 12-month low of 4.75 percent in July 2024, however, food inflation is hovering around 8.7 percent.
During 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. Currently, the benchmark lending rates are hovering above 8 percent.
Impact of unchanged repo rate on existing and new home loan borrowers
"The unchanged repo rate and potential rate cuts in upcoming MPC meetings are positive signs for home loan borrowers, making it an opportune time for them to make home-buying decisions and for existing borrowers to repay their loans and reduce their burden," says Adhil Shetty, CEO of Bankbazaar.com.
New Borrower? Search for Narrowest Possible Spread
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, State Bank of India (SBI) and Bank of India both 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 effective home loan rates hike to liquidity, which have affected not only HDFC Bank but others as well.
With the rise in effective rates, borrowers have the option of switching to other lenders which offer narrower spreads and lower interest rates to save on interest costs, say experts.
New home loan borrowers should search for banks offering loans with the narrowest possible spread to reduce the interest payable.
Also read | Home Loans: Who's got the lowest rate on offer among these housing finance companies and NBFCs?
Prepay to Lower Interest Burden
The key to reducing your home loan liability is making some partial prepayments and getting the principal reduced. Just an extra few thousand rupees every month from your savings and investments 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.
Also read | Lenders are cautious on higher NPA levels, but no alarm bells so far: Amit Diwan
Switch the Lender
There are opportunities to switch lenders in the current scenario, with several banks offering home loans starting at around 8.35 percent.
“The best time to transfer the home loan is the initial years because the interest outflow is maximum,” said Amit Diwan, Chief Distribution Officer, IMGC. In the initial years, you need to keep a close watch on the interest rate movement because the outflow of interest as a percentage of the EMI is the highest at that point in time, he added. So, the quicker you can get down the ratio of interest going out, the better it is, and you will prepay the loan faster.
This is important, particularly for borrowers whose home loans are linked with 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 we have today.
Borrowers should keep track of interest rates that are being offered and then negotiate with their existing lenders for a lower rate. It’s a simple and low-cost exercise that can potentially save lakhs of rupees for borrowers. Non-Banking Finance Companies (NBFCs)/Housing Finance Companies (HFCs) officially offer conversion where existing borrowers can pay a small fee and switch to lower rates. Banks do not have an official process, however, upon negotiation, they do reduce rates when you intend to switch to another bank.
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