The Chopal, Home Loan – For the first time in the last five years, the Reserve Bank of India has reduced the repo rate by 0.25% to 6.25%. This move will benefit loan borrowers, especially home loan borrowers. Customers will be able to save on monthly installments, making it easier for them to manage their expenses.

Since October 1, 2019, all floating retail loans in India are linked to an external benchmark, or the repo rate. Banks must pass on the benefit of a reduced repo rate to their customers. To do this, banks adjust interest rates quarterly. If the repo rate decreases, banks must offer loans at lower interest rates to their customers.

If your home loan was taken before October 2019 and is linked to the Marginal Cost of Funds-based Lending Rate (MCLR), you can still benefit from the reduced repo rate. You can take advantage of refinancing to get the lower repo rate and start paying reduced interest on your home loan. This will lower your total interest amount and save you money.

What is the relationship between repo rate and home loans?

When the repo rate decreases, the interest rate on all linked loans also decreases. This means borrowers will have to pay lower interest on their loans. However, most banks do not reduce the EMI amount when the repo rate falls. Instead, they reduce the loan tenure, allowing borrowers to benefit from the lower interest rate.

Here’s an example of how this works:

For instance, a borrower took a 75 lakh home loan for 20 years at an interest rate of 9%. After 36 months, the interest rate drops to 8.75%. As a result of the interest rate reduction, the borrower will now pay 1.57 crore in interest on the loan, instead of 1.62 crore. The loan will be repaid seven months earlier, saving the borrower around five lakh rupees.