How Your Home Loan EMIs May Fall If Raghuram Rajan Cuts The Repo Rate

The Reserve Bank of India (RBI) will issue its next bi-monthly monetary policy statement on September 29. According to a poll by Reuters, 44 of the 51 economists said that the RBI might cut the repo rate by 25 basis points. If it happens, the repo rate will be seven per cent, the lowest in past four years. Major mortgage lenders may cut the base rate again if, repo rates fall further.

How would this influence the equated monthly instalment (EMI) on your home loan? If the RBI cuts the repo rate by 25 basis points, it is not necessary that banks cut the base rate by 25 basis points. Even if the banks cut the base rate by 25 basis points, your home loan interest rates would fall only if it is a floating interest home loan linked to the base rate.

Infographic By Sandeep Bhatnagar

But, how much would your EMI and total payment over the loan tenure fall if the interest rate declines by 25 basis points? The decline in the EMI would be modest. But, if the principal amount is huge, and the tenure period is very long, the total cost of your home loan would substantially decline. For instance, a 25 basis point cut on a loan of Rs 50 lakh over 20 years, at an interest rate of 10 per cent, would lower the cost of your home loan by Rs 1,98,058. But, on a loan of Rs 50 lakh for 20 years, if the interest rate is cut by 50 basis points, the cost of your home loan would fall by Rs 3,94,686. This is nearly eight per cent of the cost of the loan.