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RBI repo rate cut: How much will your home loan EMIs reduce?

Existing home loan customers may have to wait awhile to see an impact of the repo rate cut by RBI on their EMIs because of the reset date factor

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RBI repo rate cut: How much will your home loan EMIs reduce?
RBI Monetary Policy: MPC cuts repo rate by 25 bps

The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, voted to reduce the repo rate by 25 basis points (bps) to 6 per cent from 6.25 per cent earlier. This is the second consequent rate cut and with this development, those shopping around for home loans, car loans are likely to get a cheaper deal soon while the EMIs on some of your existing loans may come down.

Of course, that's assuming banks decide to pass on the benefits of the lowered rates to the end consumers. Repo rate is the interest rate at which the RBI lends money to banks. When the cost of borrowing goes down for banks, they are able to lower their respective marginal cost of funds based lending rate (MCLR), which directly impacts your loans. According to Mint, the 25 bps reduction in repo rate between June 30, 2017, and end-December the same year had prompted a 23 bps cut in MCLR.

In fact, several banks have already lowered their MCLRs in select tenors by 5-15 basis points in the past month, including ICICI Bank, HDFC Bank, Bank of Baroda, Punjab National Bank, Kotak Mahindra Bank, YES Bank and Union Bank of India.

For instance, consider a Rs 30 lakh home loan for a 15-year tenure. The current interest rate offered by SBI is 8.75%, which translates into an EMI of about Rs 29,983. But if the interest rate comes down to 8.5%, assuming the bank passes on the full benefit of the 25 bps rate cut today, your EMI comes down to Rs 29,542. That may not seem like much but the total reduction in your interest payable is close to a whopping Rs 80,000.

Similarly, a car loan for Rs 10 lakh for 7 years will be cheaper by Rs 10,730 if the interest rate comes down from 9.5% to 9.25%.

But in case you are dreaming of cheaper loans with immediate effect, you may be in for disappointment. In its Statement on Development and Regulatory Policies dated December 6, 2018, the RBI had proposed that all new floating rate personal or retail loans (housing, auto, etc.) extended by banks from April 1, 2019, be benchmarked to the external benchmarks, like the Repo Rate. But the regulator today deferred this decision.

"Taking into account the feedback received during discussions held with stakeholders on issues such as (i) management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and (ii) the lead time required for IT system upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates," the RBI said in a statement.

Also, existing home loan customers may have to wait awhile to see an impact on their EMIs because of the reset date factor. The interest rate of the loan for the borrower is changed only on the reset period, which is typically 1 year. So your loan rate will go down only after twelve months even if your bank reduces the MCLR rate today.Nonetheless, the RBI's decision to slash the repo rate is likely to give a breather to the battered real estate sector as fence-sitting buyers, who have been waiting for a rate cut, may take the plunge now.

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