Borrowers who pay EMI on a home loan and car loan on a flexible interest rate basis will continue to pay almost the same interest rate that applies to them from now on. But, the situation could soon change for borrowers. “Bank lending linked to repo rates may not be increased, but the cost of funds will definitely increase. Overall, a complex policy with a simple message of higher rates,” says Sandeep Bagla, CEO of TRUST Mutual Fund
As expected, the Reserve Bank of India (RBI), in its first meeting of the Monetary Policy Committee (MPC) for the financial year 2022-23, held in April 2022, kept policy rates unchanged.
The repo rate remains at 4% while the repo rate is at 3.35%.
Most banks currently offer home loans starting at an interest rate of around 6.5%. For those looking to secure a home loan to purchase their home, the interest rate environment looks favorable to them as the interest rate on the home loan is at multi-year lows.
“For home buyers, this decision will help restore confidence and facilitate access to affordable home loans and stimulate demand for housing. Low interest rates have been a crucial factor in boosting demand in the real estate sector in recent times and therefore disrupting the current momentum would have been very detrimental to the overall economic recovery,” says Ramani Sastri – Chairman & MD, Sterling Developers Pvt. ltd.
RBI continues with the “accommodative” monetary policy stance, however, most analysts expect RBI to increase the repo rate in the latter part of the fiscal year, which will impact EMIs borrowers. Loan rates may increase in the near future.
Choose a lender that offers a low interest rate based on your profile. Even a 100 basis point cut can save you a few thousand dollars in interest charges, depending on the remaining term of the loan. Assuming a home loan of Rs 40 lakh for 15 years, one can save Rs 8.5 lakh in total interest charges and even save in EMI totaling Rs 57,000 in one year, if 2% lower rate is what l borrower chooses.
Loans linked to RLLR and MCLR
If the repo rate increases, borrowers who pay EMI on loans linked to the repo-linked lending rate (RLLR), also known as the external benchmark rate (EBR) may suffer an immediate impact, while those who have MCLR-linked loans (as of April 2016) may also see a change in their EMIs as repo rates rise. If the cost of funds for banks increases, the bank’s MCLR also increases.
Borrowers who pay EMI based on the bank’s MCLR may see a review of their monthly payments as their reset date occurs. If you are a borrower with a loan tied to the marginal cost of funds (MCLR) lending rate, lowering the MCLR will help you pay lower EMIs on your loan as your reset date arrives.
Between RLLR and MCLR, each time RBI revises the repo rate, the interest rate revision is much faster in RLLR for the borrower compared to MCLR-linked loans.
Existing borrowers who already had a loan taken out before October 1, 2019 can continue their loans linked to the lending rate based on the marginal cost of funds (MCLR) or can switch to the RLLR.
MCLR loans can be replaced by RLLR loans, but the cost-benefit ratio should be carefully assessed before doing so. This may incur a cost and therefore consider the remaining term of the loan before taking this step. Before changing, we can wait a few more months to get a clear picture of the evolution of interest rates.