Home Loan Buyers Left In Lurch; May Have to Wait Till Dec for RBI to Lower Interest Rates

People who are expecting a reduction in the interest rates of home loans following Reserve Bank of India’s (RBI) proposed rate cut may have to wait till December to get this relief.

Observing the global counterparts, the central bank is likely to cut the interest rates by 50 bps but not on October 9 as it is set to announce its bi-monthly credit policy on that day. Instead, the central body is looking forward to a 50-basis point (bps) rate cut in two installments during December 2024 and January 2025.

The MPC (Monetary Policy Committee) is likely to change its monetary stance from “withdrawal of accommodation” to “neutral” in October, which marks a rhythmic change in the policy. Aditi Nayar, Chief Economist, and Head Research and Outreach, ICRA said, “A change in stance at the October 2024 meeting cannot be ruled out. This could be followed by two rate cuts of 25 bps each, in the December 2024 and February 2025 policy reviews.”

Major central banks across the world have reduced their interest rates. For e.g., in September the US Fed announced a 50 bps rate cut. Moreover, the European Central Bank (ECB), Switzerland, Sweden, Canada, Brazil are also spearheading the pack in the same direction.

From October 1, 2019 Interest charged on home loans are directly linked to the repo rate.

If RBI reduces the repo rate how will it benefit home loan buyers?

Scenario A - If RBI cut interest rate by 25 bps?

If a borrower takes a home loan of ₹75 lakh which is payable over a period of 20 years, and the payable interest will go down to 8.75% from 9% after 36 months of repayment. This means that the total amount to be paid over the remaining tenure will drop to ₹1.57 cr from ₹1.62 cr– a ₹4.97 lakh difference. In addition to this, the loan tenure will end 7 months prior to the tenure.

Scenario B - If RBI cut interest rate by 50 bps?

Taking the above example into consideration, the revised interest will reduce to 8.5% per annum. The amount to be repaid will total to ₹1.51 cr instead of ₹1.62 cr, which means that outlay of money will reduce by ₹11 lakh. Moreover, the tenure will end 16 months in advance.

How can borrowers benefit from rate cuts?

Vipul Patel, Founder of MortgageWorld, a loan consulting firm said, “Repo rate cuts with nationalised banks take effect immediately (or latest by the day after the announcement). However, private banks will implement the cut at the start of the next month / quarter, depending on the loan contract terms.” In order to take maximum advantage of the rate cutting cycle, borrowers can either lower or retain the EMI and can then reduce the loan tenure instead.

“Once the lenders reduce the interest rates of those who have availed of floating rate loans, borrowers can opt to change the tenure / EMI,” says Naveen Kukreja, Co-Founder and CEO, Paisabazaar.

Can repo rate cuts lead to spur new loans?

Following the easing of the monetary cycle, financial institutions are expected to offer new loans at lower rates of interest. In fact, borrowers can take advantage of this opportunity by transferring their existing loans to other financial institutions offering less interest rates.