Repo Rate Cut May Mean Cheaper Loans For Homebuyers

The Reserve Bank of India (RBI) announced a cut in the repo rate* by 25 basis points on March 4, 2015. This might mean cheaper home loans for homebuyers. The repo rate was cut by 25 basis points, from 7.75% to 7.5%. This is the second repo rate cut in the past two months.

While the RBI has been raising the repo rate since Raghuram Rajan became the RBI governor in September 2013, a sentiment for rate cuts has been building up in the event of falling inflation levels. In January this year, after significant falls in CPI and WPI inflation figures, the RBI decided to cut the repo rate from 8% to 7.75% only to follow up with further rate cut today.

With today’s announcement, banks are likely to follow up with cuts in home loan interest rates. After the rate cut in January, the nationalized banks like the Union Bank of India and the United Bank of India had cut their base lending rates by 25 basis points. But, many other banks had said that they would lower the home loan rates only in the next quarter in the event of another rate cut.

The repo rate cut is usually a significant event for homebuyers and homeowners. A repo rate cut might translate into lower interest rates on home loans for homebuyers and homeowners. With `Housing for All’ becoming one of the priorities of the Narendra Modi led NDA government, PropTiger.com explores the various ways in which a repo rate cut can affect the home loan rates:

If the banks lower the home loan interest rates, the homebuyers who borrow money from commercial banks at a floating rate might benefit from the repo rate cuts. If a homebuyer or a home owner had chosen a floating rate home loan, the interest rates might fall when the RBI slashes the repo rate. The commercial banks might also lower the repayment tenure without changing the Equated Monthly Instalment (EMI) .

As the banks charge a higher interest rate for fixed rate home loans, an overwhelming majority of the homebuyers in India prefer housing loans at a floating rate. They will benefit if the banks lower the home loan rates.

The repayment period for home loans in India is often up to 20 years. So, if you have a home loan of Rs 50 lakh from a commercial bank at an interest rate of 10.5% for a period of 20 years, the Equated Monthly Instalment (EMI) repayment tenure will be reduced by a year in the event of an interest rate cut by 25 basis points.

Likewise, if the bank reduces the home loan rate by 50 basis points, the repayment tenure will be reduced by two years. If the bank reduces the home loan rate by 75 basis points, the repayment tenure will be reduced by two years and eight months.

If the banks are likely to reduce the base rate, the homebuyers who have a fixed loan rate can switch to a floating rate. But, they will have to pay the lending bank the processing charge and a pre-closure charge. For some homebuyers, this might still make sense because the benefits outweigh the costs.

For more calculations on home loans and EMIs, please use The Home Loan EMI Calculator at PropTiger.com.

*The repo rate (Repurchase rate) is the rate at which the central bank lends money to commercial banks in financial need in exchange for their surplus government securities. When the RBI slashes the repo rate, the money supply in the economy goes up, and when the RBI hikes the repo rate, the money supply will go down.