Last Updated:
The Reserve Bank of India reduced the repo rate by 25 basis points to 6.25 percent, benefiting home loan borrowers. Refinancing or switching to repo rate-linked loans can reduce interest rates
Those with loans linked to repo rate could consider switching to lenders offering lower interest rates. (Representative/News18 Hindi)
In a welcome relief to borrowers, the Reserve Bank of India (RBI) on February 7 announced a reduction in the repo rate by 25 basis points. This cut lowers the repo rate from 6.50 percent to 6.25 percent, marking the first instance of the central bank reducing interest rates in five years. This reduction in the repo rate is expected to benefit borrowers, particularly those with home loans.
This is because home loans are long-term commitments. Consequently, even a small fluctuation in interest rates can significantly impact the total interest paid.
All retail floating-rate loans sanctioned after October 1, 2019 are linked to an external benchmark, typically the repo rate for most banks. This linkage mandates that banks pass on the benefits of any repo rate reduction to their borrowers.
While those taking floating-rate loans will benefit from the repo rate cut, those who have linked their loans to old benchmarks such as the Marginal Cost of Funds Based Lending Rate (MCLR) or Base Rate (RBI’s pre-MCLR lower interest rate limit) will not. However, these borrowers have options to reduce their home loan interest rates and, consequently, their loan burden.
According to a report by Moneycontrol, refinancing a home loan can be advantageous to capitalise on lower interest rates. Transferring an existing loan to a bank or Non-Banking Financial Company (NBFC) that offers repo rate-linked loans can provide access to reduced interest rates, thereby decreasing the overall interest expenditure.
According to Adil Shetty, CEO of Bankbazaar.com, individuals with loans linked to the repo rate could consider switching to lenders offering lower interest rates.
It can also be advantageous to proactively monitor prevailing interest rates and engage in negotiations with one’s bank to secure a lower rate. Many banks are amenable to reducing interest rates to retain customers, particularly if a customer signals their intention to transfer their loan.
According to experts, individuals receiving a salary increase or bonus can utilise these additional funds to make partial prepayments towards their loans. This strategy effectively reduces the principal loan amount, potentially saving substantial sums in interest payments over the loan tenure.
