The Reserve Bank of India (RBI) has lowered its repo rate for the second time in a row and this may spell good news for home loan borrowers. However, the home loan EMIs will only come down once banks cut their MCLR and transmit benefits to all borrowers. The repo rate is basically the rate of interest on the basis of which the Reserve Bank of India (RBI) is lending to banks. Whenever borrowing costs are lowered in case of banks, they can reduce their MCLR rates and these directly affect home loans. The lowering of repo rates by 25 basis points in fact between June 2017 and December 2017 had led to MCLR rates being reduced by 23 basis points as noted by experts.
When it comes to home loan EMIs being reduced, multiple banks have already reduced MCLR rates across diverse tenors to the tune of 5-15 basis points in the recent past and these include HDFC Bank, ICICI Bank, Bank of Baroda, Yes Bank, Kotak Mahindra Bank, Punjab National Bank and Union Bank of India. Existing borrowers will have to be patient until the next reset date arrives for their MCLR linked home loan. The interest rate will change once the reset date comes and this is mostly 6 months or 1 year. The loan interest rate will thus reduce in another few months depending on when the reset date comes.
The RBI has given major relief to the Indian real estate industry with the reduction in repo rates and this decision may spur several prospective property buyers to go ahead and buy their preferred residential housing units. The RBI has now lowered the repo rate from 6.25% to 6% which is a cut of 25 basis points. The Reserve Bank of India (RBI) had previously suggested that new retail and personal loans on floating rates from 1st April, 2019, should have an external benchmark like the country’s repo rate. However, the RBI has now postponed the final decision on the same. This may affect the decisions of Indian banks to transfer benefits of the reduced repo rate to borrowers.
The RBI has already opined that feedback was garnered when stakeholders were consulted about aspects like risk management of interest rates by banks from the fixed interest rate tied liabilities against the assets tied to the floating interest rate and related hurdles. They were also consulted about the lead time necessary for upgrading IT infrastructure. Thereafter, the Reserve Bank of India (RBI) has decided to postpone the decision and work on a more effective system for rate transmission. Suppose there is a home loan amount of Rs. 35 lakh that is being offered for a period of 20 years and an interest rate of 8.75%. The EMI will be Rs. 30,930 as per effective calculations. Now, if the rate of interest is lowered to 8.5%, the EMI will be lowered to Rs. 30,374. This equates to a lower EMI which reduces by around Rs. 556 on a monthly basis which is Rs. 6,672 annually. Additionally, this works out well if you consider the interest savings. The total interest paid now will be Rs. 37,89,716 as compared to Rs. 39,23,170 previously. This equates to savings of a whopping Rs. 1,33,454.
The same benefits will also be possible in case of car loans. The deferring of the decision to link home loans to external benchmarks may also have a bearing on how much customers benefit in the short or midterm. Existing customers will have to be patient until the reset date comes for their MCLR linked home loans. The rate of interest will change after the reset date. New customers, however, will be able to get lower rates if their bank has reduced the MCLR in line with the repo rate cut. The deposit rate may also be lowered by several banks as per several reports. This will equate to returns becoming lower from instruments like FDs (Fixed Deposits). The best rates of interest on FDs usually range between 7.50-8.25% on an average. However, there could be a cut in FD rates to the tune of 20-25 basis points as per reports in the near future.
Banks have been prompt in lowering deposit rates post the cut in repo rates and this could be the same after the recent RBI decision. However, debt mutual fund investments may get more attractive as a result of the repo rate cut. The prices of bonds will naturally increase once there is a reduction of rates of interest. This will affect those who have invested in bonds and debt mutual funds. They can expect higher NAVs (net asset values) as a result. Debt investors for the long term can leverage this scenario by investing for the long haul above all else. The home loan EMI will thus come down once banks transmit the benefits of the repo rate cut to customers faster.