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November 30, 2016

Home Loan Rate Cut: Boon for Buyers

RBI’s decision to reduce the repo rate by 25 bps will let existing consumers pay off their home loans at subsidised rate and attract new loan seekers.



One of the longest standing item in the list of liabilities is a home loan since they usually run for 15 to 20 years of repayment cycles. Therefore, a rate cut on these home loans is always a welcome move. Change in interest rates is always a direct result of a change in repo rates by the RBI.

Repo rate is the rate at which the Reserve Bank of India lends money to the commercial bank. When this rate reduces, commercial banks can reduce the costs and hence charge a lower rate of interest on loans that they generate to public. This is the main reason for increased liquidity and an upward surge in the markets.

However, a lot of borrowers do not get to see the effects of reduced repo rate in the form of a reduction in the interest rate on home loans. This happens because these commercial banks have a base rate and the interest rate cannot be reduced unless they reduce the base rate. Banks usually do this to recover the lost interest that they have suffered during inflationary conditions when banks bore the brunt of high repo rates. This is the reason why borrowers do not get the benefit of reduced interest rates immediately.

Rate cut impacts majorly only to those who opt for floating interest rate for their loans. Fixed rate of interests on home loans remains unchanged irrespective of changes in the market lending rates. A small shift in the interest rate on home loans can save you an enormous amount of money and can reduce the tenure of your home loan.

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