The Reserve Bank of India (RBI) in its bi-monthly meeting of the Monetary Policy Committee held on December 8, 2021 kept the repo rate unchanged at 4 per cent.
The status quo on the policy rate comes as a relief to those servicing EMIs on home loans and car loans as they will continue paying the same rate of interest as applicable to them currently.
However, this relief may be restricted only to those paying EMIs on home loans linked to the bank’s Repo Linked Lending Rate (RLLR). The borrowers paying EMIs on home loans linked to the bank’s Marginal Cost of Funds based Lending Rate (MCLR) may still see a revision in their next month’s EMI.
“The RBI’s decision on keeping the repo rate unchanged will certainly bode well for all interest-sensitive sectors ahead of the New Year when the economy is on its road to recovery. The homebuyers should take advantage of the current situation because there are chances that the prices might go upwards later on account of reducing supply and the pressure of increased costs of raw materials,” says Ramani Sastri – Chairman & MD, Sterling Developers Pvt. Ltd.
The low interest rate environment may also suit the investor community in the real estate sector. “For any investor, it’s a time of great opportunity and for the end-customer, it’s a good time to buy. People are looking for own homes and are purchasing second homes in the context of the pandemic as they would have a secure and safe home and would also be a good alternative to their primary abode,” says Lindsay Bernard Rodrigues, CEO & Co-Founder, The Bennet and Bernard Company, known for luxury holiday homes in Goa.
Even if the RBI has not revised the repo rate, those borrowers who are paying EMIs based on MCLR may see some revision in their monthly installments as and when their reset-date comes. If you are a borrower with a loan linked to Marginal Cost of Funds based Lending Rate (MCLR), the fall in MCLR will help you pay lower EMIs on your loan as and when your reset-period comes up.
Since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI repo rate. Every time, RBI revises the repo rate, the revision in the interest rate is much quicker in RLLR for the borrower compared to the loans linked to MCLR. The Marginal Cost of Funds based Lending Rate (MCLR) was introduced from April 2016. Among other factors, the MCLR is based on the bank’s own cost of funds.
For most banks, the fresh home loans are based on the bank’s Repo Linked Lending Rate (RLLR), also referred to as an external benchmark rate (EBR). The banks, however, may not offer loans on their RLLR but depending on the loan amount and other factors, the effective rate may differ.
Most banks are currently offering home loans starting at an interest rate of around 6.5 per cent or even lower and the actual rate of interest will depend on the loan amount, profession, gender etc,. For those looking to get a home loan to buy their home, the interest rate environment appears conducive for them. Some of the banks that a new borrower may explore for the best home loan interest rate include SBI, LIC Housing Finance, Bank of Baroda, ICICI and HDFC, Kotak Mahindra Bank etc.
Existing borrowers who have already taken a loan taken before October 1, 2019, may continue with their loans linked to Marginal Cost of Funds based Lending Rate (MCLR) and not switch to Repo Linked Lending Rate (RLLR). The MCLR loans can be switched to RLLR but one should carefully evaluate the cost-benefit before doing so. This may incur a cost and hence consider the remaining tenure of the loan before taking this step. Before switching, one may wait for a few more months to get a clear picture of the interest rate movement.
Choose lender with lower rate
Choose a lender that offers a low rate of interest based on your profile. Even a 100 basis points reduction can help you to save a few lakh in interest cost, depending on the remaining tenure of the loan. Assuming a home loan of Rs 40 lakh for 15 years, the savings in EMI and interest ( On 200 basis points lower rate) will be:
EMI Saved – Rs 4758 ( Annually Rs 57,000)
Total interest saved – Rs 8.5 lakh
Another way to keep the interest burden low is to keep prepaying principal on regular intervals. It is better to prepay every 6 months or on an annual basis so that the outstanding principal amount comes down much early. Any such prepayments should ideally be done in the initial stages of the loan as interest cost is more during the first few years of the loan. You may use a home loan repayment calculator to know how much the savings will be.
What to do as a borrower
New borrowers may explore 2-3 lenders and ask for the effective home loan interest rate based on their loan amount and period of loan. As and when the repo rate goes up, the borrowers paying EMI on loans linked to RLLR will be impacted much quicker than those loans linked to MCLR. Therefore, remember, whether it’s MCLR or RLLR home loan, keep a prepayment plan handy to repay the loan amount as early as possible. The earlier you repay the loan, the lower will be the interest burden for you.