Most home buyers, irrespective of how much they earn, feel the pinch when they have to shell out money every month to pay for EMIs on Home Loans. Any drop in the EMI amount would bring cheer to existing and new Home Loan borrowers.
With the Reserve Bank of India cutting repo rates by 25 basis points from 6.5% to 6.25%, which is the lowest in six years, loan borrowers are hopeful about a decline in interest rates, which would translate into a reduction in EMI amounts.
Additional Reading: 6 Common Mistakes Made By First-Time Home Buyers
The relation between repo rates and loan EMIs
Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. As a lower repo rate would mean paying less to the RBI for the banks, it would mean paying back loans at a lower interest rate for the borrowers. The fall in interest rate would see the number of borrowers go up, thereby, increasing profits for the banks.
However, a repo rate cut does not always lead to a decline in interest rates. Only if the banks reduce the base lending rate, the loan EMI comes down. Also, the banks need to check if they are able to have enough margins by compensating for loan defaults and NPAs before passing on the benefits to borrowers.
Current Home Loan rates and interest rates once banks pass on rate cut benefits
Since the current repo rate cut looks promising for the Home Loan borrowers, here is a quick comparison between the existing and likely interest rates of leading banks.
| Bank | Current Interest Rate | Current EMI per Lakh for 30-year tenure | Likely Interest Rate following the repo rate cut | Likely EMI per Lakh post rate cut for 30-year tenure |
| SBI | 25 bps above the MCLR i.e. 9.30% p.a. | Rs. 826 | 9.05% | Rs. 808 |
| ICICI Bank | 9.35% | Rs.830 | 9.1% | Rs. 812 |
| HDFC Bank | 9.45% | Rs.837 | 9.2% | Rs. 819 |
| PNB | 9.45% | Rs.837 | 9.2% | Rs. 819 |
| Axis Bank | 9.5% | Rs.841 | 9.25% | Rs. 823 |
Will a mere 0.25% decline result in adequate savings?
A 0.25% decline in interest rate may appear too small to make a substantial difference in a short period of time, but it could help you save in the long run.
For example, if you have a Home Loan of Rs. 50 lakh to be paid back over a tenure of 20 years with an interest rate of 9.5%, your loan EMI would come down to Rs. 46,607 with a total payable interest of Rs. 61,85,574. So, at the end of the loan tenure, you would end up paying a total amount of Rs. 1,11,85,574 including principal and interest.
If your bank cuts down the interest rate to 9.25%, the loan EMI would be down to Rs. 45,793, translating to a total payable amount of Rs. 1,09,90,402 at the end of the loan tenure.
Thus, you would end up saving up to Rs. 1.95 lakh on the total payment of your Home Loan.
Drop in repo rate: Ideal time to consider home loan refinance?
If you’re not happy with the rates being offered by your current financer on your Home Loan, you have the option of moving to the MCLR regime within the same bank or to an MCLR-linked loan at another bank. Even a 0.25% difference between the two interest rates could potentially save you lakhs of rupees in the long run.
All you need to do is pay a processing fee along with a legal fee to your new lender which amounts to a small percent of your due loan amount.
Additional Reading: When Is Home Loan Refinancing A Good Idea?
If your Home Loan is nearing completion, the rate cut would not impact you much. So, if you have an existing loan, do keep an eye on the total interest saved either by reducing the tenure or EMI or moving your loan to another bank.