Repo Rate Cut: How it Impacts Existing and New Borrowers

Good news for homebuyers! During the end of September 2015, RBI made a surprise move by reducing the repo rate to 6.75%, that is, by 50 basis points. It has made a positive impact on the home loan interest rates as the banks have reduced the same by 40 basis points. Several types of home loans are being offered by the banks at reduced rates.

Repo Rate Cut How it Impacts Existing and New Borrowers

For the readers who do not know much about Repo Rate, here is a detailed description.

Repo rate is the rate at which the RBI lends money to other commercial banks when they fall short of funds. A reduction in repo rate means that the banks can borrow funds from the central bank at lower interest rates and when they are benefitted they pass on the benefits to their customers by reducing the rates of interest on different types of loans they offer like home loan, car loan, etc.

The base rate at which RBI lends money to commercial banks was around 10 percent last year. After the reduction in repo rate, this rate has been reduced down to below 10 percent for several banks. For major lending banks like ICICI, SBI and HDFC, the rates ranges between 9.5% to 9.35%. So, for the buyers interest on home loan has been reduced by 0.75%.

The repo rate cut has three types of positive impacts on the home loan borrowers:

  • Reduction in EMI amount- You may save a negligible amount monthly but in the long run it would be significant enough to make a difference.

  • Increase in EMI eligibility- The reduction in base rate cut will improve your EMI eligibility.

  • Reduction in loan tenure- The cut down in interest rates will consequently reduce the tenure of your home loan.

This surprise rate cut is going to affect existing borrowers and new borrowers differently. An existing borrower can either opt for reducing the EMI which would increase his monthly disposable income or he can reduce the loan tenure so that he can get rid of the loans a few months earlier. You must choose one option smartly as the banks also take re-financing charges in such cases. Experts suggest that you should transfer home loan only if you are getting 0.5% rate reduction. For the new borrowers it is a great time as they can avail home loans at reduced rates of interests. You should take help of a financial advisor to select the right lending bank.

This cutdown in repo rates also has some negative aspects. For example, those who have invested in Fixed Deposits (FD) or Recurring Deposits (RD) will get a lower return on investments. Apart from the very few downsides for other investors, Repo rate cut is a good move for the homebuyers. You must take the right advantage of this situation and make a wise move towards your dream home.

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