The Reserve Bank of India (RBI) controls the overall lending market in the country through various means, one of which is the repo rate. With indirect regulation of lending rates, the body can encourage or discourage borrowing, thereby influencing the nation’s economy.
Due to the on-going financial crisis, the RBI announced a 40-basis point reduction in the repo rate.
Such a move means good news for prospective and existing home loan borrowers, as the repo rate cuts result in interest rate decrease for the consumer as well. Since individuals servicing their housing loans will need to bear a lower home loan EMI, they can use the excess money to fund other essential expenses or add it to their monthly savings.
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What Is the Repo Rate?
Before proceeding further, one should have a clear understanding of what the current repo rate represents. In simple terms, the repo rate is nothing but the rate of interest at which the Reserve Bank of India offers loans to other financial institutions operating in the country.
Thus, any change in this rate often translates into a change of interest rates on housing credit as well.
One basis point is equal to one-hundredth of a percentage. Thus, a 40-basis point rate cut translates into a decrease of 0.4% in the prevailing rates. For example, if a borrower-paid home loan interest at a rate of 7.25% previously, the rate is likely to decrease with the reduction in repo rate.
It is crucial for individuals to understand what they can expect from such repo rate cut announcements.
Two ways in which repo rates decrease your repayment burden
Borrowers can choose to take advantage of such rate cuts by reducing loan tenor. Alternatively, they can keep the tenor constant and reduce their home loan EMI amount. Regardless of the option that one chooses, such rate cuts will lead to considerable savings when it comes to the total interest payable on such a loan.
Nevertheless, borrowers can also take matters into their own hands when it comes to reducing home loan interest rates. Following a few tips will allow an individual to minimise EMI liability from his/her housing credit effectively.
Tips to decrease home loan burden for existing borrowers
Home loans have a substantial tenor when compared to other credits, often encompassing 20 or 30 years of repayment. These are high-value advances amounting up to Rs.3.5 crore, depending on the property value to be purchased. Thus, borrowers often pay a sizable chunk of their monthly income for repayment in spite of low home loan interest rates. Thankfully, one can follow certain measures to ease this financial burden.
- Opt for a home loan balance transfer
Home loan consumers can transfer their existing loan to a different lender if the new lender charges lower interest rates. After such a transfer, one would need to repay their existing loan under new terms set by the second lending institution. Furthermore, such a balance transfer does not harm the borrower’s CIBIL score.
Apart from these, there are several other reasons why you should be choosing a home loan balance transfer.
Still, keep in mind that your new lender treats such balance transfers as fresh loan applications. Thus, you would need to bear the processing fee and additional charges for the same.
- Restructure your home loan to increase the tenor
Even when a housing loan repayment is underway, one can apply for a tenor extension. When the tenor increases, your monthly liabilities will decrease considerably.
However, keep in mind that such restructuring of loans will harm credit scores. Thus, by undertaking a tenor extension on an existing loan, you may hurt your chances of availing credit in the future.
Tips to decrease home loan burden for new borrowers
Individuals who are planning to avail home loans can follow these tips to ensure affordable home loan EMI.
- Make a considerable down payment
Financial institutions sanction 75% to 80% of a property’s cost as a loan, while the owner needs to furnish the rest as a down payment. Maximising this payment can prove beneficial for your home loan repayment.
If one decides to pay a major portion of property value through a down payment, he/she would need to borrow less. Thus, with the decreased loan amount, home loan EMI would also be lower.
- Compare the various loan offers
Borrowers should never blindly choose their preferred financial institution while availing such high-value loans. Instead, they must do a detailed comparison between the top HFCs offering housing loans. A home loan EMI calculator can help determine the exact monthly liabilities that one would need to pay after availing such loans.
Repo rate cuts are fortunate occurrences for borrowers. Additionally, one should take proper steps to lower their loan burden by following some of the tips mentioned above.