The RBI began slashing down its repo rate in March 2020, owing to the poor economic conditions prevailing at the time. After the Union Budget FY22, the apex bank of India announced its decision to continue with the 4% repo rate prevalent since May last year. This involved a 115 bps rate cut from March. This is an accommodative stance taken to boost economic activity and reduce financial burden in the face of recession.
Here is a detailed discourse on the importance of this rate and how it affects housing loan borrowers.
Repo rate and its importance
A tool to control cash flow in markets, the repo rate is the interest rate at which financial institutions can borrow money from the RBI against government securities. Therefore, a rate cut directly affects the lending rates of creditors, including those providing housing finance. Financial institutions need to reset these rates every 3 months.
These successive revisions have compelled most HFCs to bring down their home loan interest rates to below 7% as of March 2021. Such low lending rates have given rise to higher demand for repo-linked home loans and subsequent boost in the real estate market.
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How do reduced rates affect existing and new borrowers?
Home loan tenors are remarkably long and can last for up to 30 years. This is a sufficiently long period for borrowers to witness several home loan interest rate changes in the course of their repayment. Similarly, the current all-time-low Repo Linked Lending Rate (RLLR) provides an excellent opportunity for borrowers to enhance their interest savings. Following are some of the ways in which new and existing borrowers can benefit from the same.
- Existing borrowers with funds linked to Marginal Cost of Funds-based Lending Rate (MCLR) have the choice of switching to RLLR for lower EMIs. This process will cost them an additional administrative fee.
- Individuals with an external benchmark-based home loan can enjoy reduced EMIs after their lender lowers its spread or margin on interest rates.
- New borrowers can find this the best opportunity to apply for home loan with RLLR.
However, potential borrowers need to look out for specific strategies to enjoy optimum savings on interest payment.
Strategies to lower your home loan interest rate
Besides repo rate, MCLR rate, lender’s margin, and base rate, housing finance interest rates are heavily dependent on an applicant’s eligibility and financial records. To avail lower borrowing costs, make sure to:
- Compare different lenders: Perform a thorough inspection of the several policies offered by a variety of lenders. Besides interest rates, check for repayment options, tenor availability, flexibility in switching from fixed to floating interest rates, and vice versa. Also, check for additional charges before picking a suitable creditor.
- Have a high CIBIL score and income: Sporting a healthy credit profile assures lenders of your creditworthiness. Again, a high income lends you a greater repayment capacity. Meeting these requirements, besides other home loan eligibility and documents required, can help you negotiate for a lower interest rate.
- Make a larger down payment: This will automatically bring down your loan requirement, and you will have a lesser debt burden to bear. Also, this will make your financial capability appear stronger before lending institutions.
- Opt for a shorter tenor: Potential borrowers can use a home loan calculator to adjust their repayment tenor so that they have to pay the least possible interest against their required amount.
All these tips mentioned above can be highly beneficial precautionary steps for new borrowers. If you are an existing housing loan borrower, consider a balance transfer to enjoy the benefits of the new repo rate. Again repeat the steps mentioned above to avail of maximum savings on refinancing.
