RBI keeps repo rate unchanged: Are you paying over 8.5% on home loan? Here is how to reduce interest cost

The Reserve Bank of India (RBI) announced that it would keep the repo rate, the rate at which banks borrow from the central bank, unchanged after its three-day Monetary Policy Committee (MPC) meeting concluded on Thursday. Experts say it is time to review your home loan rates and if you are paying a significantly higher premium over the repo rate, then you can consider refinancing—where you transfer the existing home loan to another bank offering a lower rate.

“The worst seems to be over. Interest rates are stabilising. Inflation permitting, we may see rates drop before the end of 2023. If you’re on a repo-linked loan, your rate should automatically reset after any repo rate change within a quarter. The lowest rates being offered in the home loan market today are in the range of 8.40–8.50 per cent for eligible borrowers. If you’re paying a significantly higher rate, consider a refinance. If you’re able to shave off 50 basis points or more from your rate, it could lead to significant savings over the long term. When you think about your home loan rate, also think of it in terms of the premium you pay over the repo. For example, at 8.50 per cent, the premium over the repo is 2 per cent. Prime borrowers with good credit histories and strong income credentials can borrow at the lowest premium while others will have to pay higher,” Adhil Shetty, CEO, BankBazaar.com.

Since May 2022, the RBI has raised the repo rate six times, resulting in a total increase of 250 basis points to 6.50 per cent. While the pause benefits borrowers, it is still important to find ways to manage home loan interest rates.

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Higher interest rates lead to increased equated monthly instalments (EMIs) if you wish to continue with the existing repayment schedule. For instance, on a home loan of Rs 50 lakh with a 15-year tenure at 7 per cent, the revised EMI would be Rs 52,211, compared with the old EMI of Rs 44,941—an increase of Rs 7,270. Extending the loan tenure is one way for existing borrowers to cope with rising interest rates. However, this option comes with the drawback of higher interest expenses. In the given example, extending the tenure by 7.5 years due to a 2.50 percent interest rate increase would result in paying an additional Rs 40 lakh in interest over the extended period. As loan tenures have already increased significantly, banks resorted to increasing EMIs as a default measure.

How to Save on Interest

Refinance with your current lender: Request a lower interest rate from your existing lender. This option is relatively cheap, requires minimal paperwork, and can result in interest savings.

Refinance with another lender: Consider a balance transfer to another lender. While this option may involve processing and legal fees, it can lead to reduced interest costs. However, it also entails paperwork.

Opt for a higher EMI: Voluntarily choose to pay a higher EMI. This approach does not incur any additional costs, and it enables the loan to be paid off faster. The downside is a higher monthly outflow.

Prepay: If you have a lump sum amount, you can utilise the prepayment facility to repay your loan before the scheduled tenure. For example, a loan of Rs 20 lakh with an interest rate of 9 per cent for 20 years results in a total payable amount of Rs 43.18 lakh with an EMI of Rs 17,995. If the borrower chooses to prepay the loan in full after 10 years, the amount to be paid would be Rs 14.20 lakh, resulting in an interest saving of Rs 7.38 lakh. However, before making a prepayment, consider the tax benefits you are currently availing on home loans.

Although the RBI has decided to maintain the repo rate at 6.5 percent, it remains prepared to act if the situation calls for it. Considering the possibility of rising interest rates in the future, it is advisable to save on home loan interest cost.