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Home loan interest rate to remain at multi-year low as RBI keeps repo rate unchanged

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.

Home loan, interest rate, borrowers, emi, repo rate, rbi
The repo rate remains at 4 per cent while the reverse repo rate is at 3.35 per cent.

In the last meeting of the Monetary Policy Committee (MPC) during the financial year 2021-22 held in February 2022, the Reserve Bank of India (RBI) kept the policy rates unchanged. The repo rate, thus, remains at 4 per cent while the reverse repo rate is at 3.35 per cent.

RBI repo rate has a direct and an immediate influence on the home loan interest rate. Repo rate is the rate of interest at which the banks borrow money from the RBI while Reverse repo rate is the rate at which the banks earn by keeping surplus funds with RBI.

Since October 1, 2019, RBI has mandated banks to offer retail loans such as home loans and auto loans linked to an external benchmark, which for most banks is the RBI repo rate. For most banks, fresh home loans are based on the bank’s Repo Linked Lending Rate (RLLR), also referred to as an external benchmark rate (EBR).

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.

Going forward, those paying EMI on home loan and car loan based on a flexible interest rate will continue paying almost the same rate of interest as applicable to them currently.”The continuation of the low home-loan interest rate regime is bound to instill more confidence in the home buyers and support the ongoing market and economic recovery which has been promising in the recent past,” says Lincoln Bennet Rodrigues, Chairman & Founder, The Bennet and Bernard Company.

Most banks are currently offering home loans starting at an interest rate of around 6.5 per cent. For those looking to get a home loan to buy their home, the interest rate environment appears conducive for them as the interest rate on home loan is at a multi-year low nowadays.

The banks may not offer loans on their RLLR but depending on the loan amount and other factors, the effective home loan interest rate may differ. On an average, for the majority of borrowers based on the loan amount, profession, gender etc, the home loan interest rate is 7 per cent or even higher across most banks. 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.

Even those borrowers who are paying EMI based on bank;s 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-date comes up.

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) or can switch to 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 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, one can save Rs 8.5 lakh in total interest cost and even save in EMIs totalling Rs 57000 in a year, if a lower rate of 2 per cent is what the borrower chooses.

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