Those expecting a cut in their home loan EMIs in the wake of the Reserve Bank of India (RBI) dialling down the repo rate may have to wait until December for some relief, according to economists.
The central bank could emulate its global counterparts and effect a 50-basis point (bps) rate cut in two instalments, but not on October 9, when it is set to announce its bi-monthly credit policy. Instead, these cuts could be made in December 2024 and February 2025. The repo rate has remained unchanged at 6.5 percent since February 2023.
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However, there is an expectation that the MPC will shift its stance from “withdrawal of accommodation” to “neutral” in October, marking a crucial inflection point in its policy. “A change in stance at the October 2024 meeting cannot be ruled out. This could be followed by two rate cuts of 25 bps each, in the December 2024 and February 2025 policy reviews,” says Aditi Nayar, Chief Economist, and Head Research and Outreach, ICRA. The views of the new (external) MPC members would be important in determining future monetary policy outcomes, she added.
Kanika Singh, Chief Risk Officer at the Indian Mortgage Guarantee Corporation (IMGC) also expects a rate cut in December, given the improving inflation outlook in India and the global monetary easing cycle. “A minimum 25 bps rate cut is expected,” she added.
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Globally, central banks are easing interest rates. For instance, in September the US Federal Reserve eased interest rates by 50 bps. The European Central Bank (ECB), Switzerland, Sweden, Canada, Brazil, Peru, and China have also eased their monetary policy.
Given that from October 1, 2019, home loan interest rates are directly linked to the repo, a benchmark lending rate, home loan customers stand to benefit from cuts in the repo and a declining interest rate cycle.
Here’s a look at how these cuts, if they materialise in line with expectations, will reduce home loan interest rates.
Benefits for existing home loan customers
If you are an existing home loan customer, the reduction in interest will depend on the elapsed loan tenure.
Say, a borrower has taken a home loan of Rs 75 lakh payable over 20 years, and the interest rate goes down from 9 percent to 8.75 percent after 36 months of repayment. In such a scenario, the total amount to be paid over the remaining tenure will drop to Rs 1.57 crore from Rs 1.62 crore, saving Rs 4.97 lakh; moreover, the loan will be closed seven months earlier.
In the same example, suppose there is a 50 bps rate cut, then the revised interest rate will be 8.5 percent per annum. The amount to be repaid over the remaining tenure will be Rs 1.51 crore instead of Rs 1.62 crore, which means that the outgo will be lower by Rs 11 lakh, and the loan will be closed 16 months earlier (see graphic).
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When will borrowers benefit from a rate cut?
“Repo rate cuts with nationalised banks take effect immediately (or latest by the day after the announcement). However, private banks will implement the cut at the start of the next month / quarter, depending on the loan contract terms,” says Vipul Patel, Founder of MortgageWorld, a loan consulting firm. Borrowers can choose between lowering the EMI, or retaining the EMI and reducing the loan tenure instead.
“Once the lenders reduce the interest rates of those who have availed of floating rate loans, borrowers can opt to change the tenure / EMI,” says Naveen Kukreja, Co-Founder and CEO, Paisabazaar.
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Switch lenders to maximise rate cut benefits
Since the cost of funds are likely to come down with the easing of the monetary policy, financial institutions are expected to offer new loans at lower rates of interest. “Borrowers can use this opportunity to transfer their loans to financial institutions offering these rates and lower their EMI,” says Singh.
A rise or dip in your credit score can change your interest rates. “So, especially during the festive season, keep an eye on your spends and make sure there are no misses when it comes to repaying your bills and EMIs,” says Adhil Shetty, CEO, Bankbazaar.com.
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