RBI Cuts Repo rate: What it can do to home loan EMIs?

The RBI on Friday announced cut on repo rate by 40 basis points from 4.4% to 4% due to anticipated dip in the GDP growth and loss of production prevailing amid country lockdown. This announcement by RBI is good news for home loan borrowers with secure income as this repo rate slash has brought down the interest to 7% which is the lowest in over 15 years.

Repo rate

Individuals with a secure income who are facing uncertainty because of the lockdown can avail the option of an additional three month moratorium to get their financial situation stable. Also, those borrowers who have not availed any moratorium but are now facing income instability can also defer their payments for 3 months.

Repo rate- Reduced EMI

This is a benefit for existing home loan borrowers also, where the SBI’s interest rates on home loan of up to 30 lakh will thereby come down to 7% from the existing 7.4% and, on loan between Rs 30 lakh and Rs 70 lakh to 7.25% from 7.65% and, above Rs 75 lakh to 7.35% from 7.75%. Women borrowers will get an additional slash of 5bps.

 

Since October 2019, when home loan rates were linked to repo rates, the interest has been cut by 1.4 percentage points and due to this, the EMI on an Rs 30 Lakh loan which was Rs 22,855 in October 2019 is now Rs 19,959- a reduction of Rs 2,896.

 

Housing finance companies and those banks that have not linked their housing loan rates to repo rates, may not pass on the reduction of the repo rates to their housing loan. However, the competition that is driven by slash in housing loan rate in many banks, HDFC has already brought down the rates to 7.50%.

On May 8, some of the banks like SBI increased the rate on home loan for new borrowers by 20bps, increasing the margin over the benchmark rate of 7.05% fixed against the repo rate. SBI justifies it by saying that the credit risk of the borrowers has gone up due to the Covid-19 pandemic and so the bank had increased the risk premium by 20bps.

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