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On 28 March 2020, the Reserve Bank of India cut the repo rate by 75 basis points and reserve repo rate by 90 basis points (100 basis points/bps = 1 %). The repo rate now stands at 4.4 % and reserve repo rate at 4 %. This news gives some relief to the home loan borrowers as it will reduce their monthly instalment burden. It will also help people to take new loans at a cheaper rate.
This emergency rate cut was announced to ward off recession as a result of the global outbreak of the COVID-19 pandemic. The previous repo rate cut was announced by the RBI on 1st October 2019.
Consider if you have taken an SBI home loan of Rs.30 lakhs for a tenure of 20 years at a rate of 7.95%. The new reduced interest rate which is linked to the repo rate will be 7.2%. This will result in an EMI reduction of Rs.1379 approximately.
Now let us discuss how the reduced loan rates will impact the new borrowers.
If you are someone who is planning to take a new home loan, this RBI rate cut is a good sign as you can avail loans at lower interest rates. If you are taking a loan linked to an external benchmark such as repo rate, treasury-bills etc, you must compare the risk premium charged by the bank to avail the lowest rate. Loans interest rates linked to external benchmarks are more unstable than the MCLR linked rates.
Moreover, you can also check if you can avail the benefit of credit subsidy for your home loan through Pradhan Mantri Awas Yojana (PMAY) scheme. Middle-income group - I (MIG -I) with income between Rs 6 lakh and Rs 12 lakh can avail interest subsidy of 4 % whereas middle-income group - II (MIG -II) with income between Rs 12 lakh and 18 lakh can get interest subsidy of 3 % under the PMAY scheme.
For instance if you are a first-time home buyer planning to purchase a ‘Smile Homes’ apartment from Confident Group, the interest rate will be 7.2% approximately. After availing the PMAY credit linked subsidy, the actual interest payable will be somewhere around 3.2 %.
We hope that this article was helpful to you. If you need any assistance regarding home loans you can get in touch with us.
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