A basis point (bps) is a standard unit, used to measure the change in the lending rate or value. On May 22nd, RBI cut down its repo rate by 40 bps – one basis point is equivalent to 0.01% – in a move to mitigate the adverse impact of the COVID-19 pandemic, on the finance sector. Presently, the repo rate stands at 4%.
In addition to the rate cut, RBI extended the loan moratorium facility until August 31st, to bring immediate relief to borrowers struggling to repay their EMIs and to businesses facing an acute cash crunch.
So, what does this mean for home loan borrowers? Let’s find out.
What Is Repo Rate?
Repo rate is the interest rate that affects your interest and which RBI – the central bank of India – lending money to the commercial banks and lending institutions, in the case of fund shortage. The repo rate allows the RBI to regulate the money supply, inflation level, and liquidity in the country.
Considering this, RBI’s latest repo cut can incentivize the lenders with reduced borrowing costs, especially with big-ticket loans like a home loan. The Indian economy can experience a steady boost, as a reduced repo rate will increase the money supply significantly.
Home Loan Rates linked to Repo Rate
For existing borrowers, with a repo rate linked home loan interest rate, the rate cut will bring an immediate positive impact. Once lenders transmit the rate cut, it will bring down the cost of borrowing so that borrowers can expect a reduction in their home loan EMI payments. Thanks to the rate cut, new borrowers can secure a loan at cheaper home loan rates, once the lenders reset their interest rates.
Home Loans Linked to MCLR
Conversely, a home loan linked to the marginal cost of funds-based lending (MCLR) may not witness immediate benefits. This is because an MCLR rate depends on both external factors like rate cuts and internal factors like the lender’s reset date, deposit rates, etc., so the impact is not direct.
Therefore, any reduction in MCLR will result in lower EMIs only when the reset date set by the lender arrives. Most lenders have a longer reset date as compared to repo-linked loans, and maybe slow to change the MCLR to protect their margins. As a result, borrowers with an MCLR home loan will continue to pay the same home loan interest rate until the next reset date arrives.
The Bottom Line
The impact of RBI’s latest rate cut is positive as well as negative for both the existing and new borrowers. Therefore, before you apply for a home loan online, do consider the impact of the policy rate cut on your borrowing and investing plans.
Use a home loan EMI calculator to evaluate the EMI amount for different rates of interest by different lenders. Also, compare the premium risk they charge over and above the external benchmark, to get the best loan plan.