EMIs on home loans to remain unchanged as RBI maintains status quo on repo rate
The Reserve Bank of India (RBI), at its bimonthly Monetary Policy Committee meeting on December 8, 2021, kept the repo rate at 4%.
The status quo on the key rate is a relief for those who manage EMIs on home and auto loans, as they will continue to pay the same interest rate that is currently applicable to them.
However, this relief may be limited to those who pay IMEs on home loans tied to the bank’s Repo Linked Loan Rate (RLLR). Borrowers who pay IMEs on home loans tied to the bank’s marginal cost of funds (MCLR) -based lending rate may still see a review of their IME next month.
Even though the RBI has not revised the reverse repo rate, borrowers who pay IMEs based on the MCLR may see a review of their monthly payments as they are reset. If you are a borrower with a loan linked to the marginal cost of funds (MCLR) lending rate, lowering the MCLR will help you pay lower IMEs on your loan as your reset period arrives.
As of October 1, 2019, the RBI has mandated banks to offer retail loans such as home and auto loans tied to an external benchmark, which for most banks is the RBI repo rate. Anytime the RBI revises the repo rate, the interest rate revises much faster in RLLR for the borrower compared to MCLR linked loans. The marginal cost of funds lending rate (MCLR) was introduced from April 2016. Among other factors, the MCLR is based on the bank’s cost of funds.
For most banks, new home loans are based on the bank’s Repo Linked Lending Rate (RLLR), also known as the External Reference Rate (EBR). Banks, however, may not offer loans on their RLLRs, but depending on the loan amount and other factors, the effective rate may differ.
Most banks currently offer home loans with an interest rate of around 6.5% or even lower and the actual interest rate will depend on loan amount, profession, gender, etc. For those looking to obtain a mortgage to buy their home, the interest rate environment seems favorable. Some of the banks that a new borrower can explore for the best interest rate for a home loan include SBI, LIC Housing Finance, Bank of Baroda, ICICI and HDFC, Kotak Mahindra Bank, etc.
Existing borrowers who have already taken out a loan taken out before October 1, 2019 can continue with their borrowing linked to the marginal cost of funds (MCLR) based lending rate and not switch to the repo linked lending rate (RLLR). MCLR loans can be replaced by RLLRs, but the cost-benefit ratio should be carefully assessed before doing so. This may incur a cost and therefore consider the remaining term of the loan before taking this action. Before changing, we can wait a few more months to get a clear idea of ââthe evolution of interest rates.
Choose a lender with a lower rate
Choose a lender that offers a low interest rate based on your profile. Even a 100 basis point reduction can help you save a few lakhs in interest charges, depending on the remaining term of the loan. Assuming a home loan of Rs 40 lakh for 15 years, the savings in EMI and interest (on a lower rate of 200 basis points) will be:
NDE saved – Rs 4,758 (Rs 57,000 annually)
Total Interest Saved – Rs 8.5 lakh
Another way to reduce interest charges is to continue to prepay principal at regular intervals. It is best to prepay every 6 months or on an annual basis so that the amount of outstanding principal decreases much sooner. Such prepayments should ideally be made during the early stages of the loan, as interest charges are higher during the early years of the loan. You can use a home loan repayment calculator to find out the amount of savings.
What to do as a borrower
New borrowers can find 2-3 lenders and ask for the effective mortgage interest rate based on the loan amount and length of the loan. As the repo rate rises, borrowers paying EMI on RLLR linked loans will be impacted much faster than those linked to MCLRs. Therefore, remember, whether it is an MCLR or RLLR home loan, keep a prepayment plan on hand to pay off the loan amount as soon as possible. The earlier you pay off the loan, the lower the interest charge will be for you.