RBI’s Repo Rate Cut Fuels Homeownership Dreams:
In a move that has brought cheer to borrowers, the Reserve Bank of India (RBI) has announced a 25-basis point reduction in the repo rate, bringing it down to 6.25 percent. This marks the first such reduction in nearly five years and is expected to provide substantial relief to those with loans, particularly home loans.
For retail floating-rate loans sanctioned after October 1, 2019, which are linked to external benchmarks like the repo rate, the benefit of this cut will be directly passed on to borrowers. Banks are mandated to reset interest rates at least quarterly, and some may do so even more frequently, depending on individual loan agreements.
Refinancing Opportunities: Switch and Save
If your existing home loan is linked to older benchmarks like MCLR (Marginal Cost of Funds Based Lending Rate) or the base rate, now might be a good time to switch to a repo rate-linked loan. Leading banks are currently offering repo-linked home loans starting at 8.35%. Refinancing to a repo rate-linked loan could reduce your overall interest burden, and banks are not allowed to charge fees for this transition.
Expert Advice: Maximize Your Savings
“Repo-linked home loan borrowers can consider switching to lenders that offer more competitive interest rates and narrower spreads, which can help reduce their overall interest burden,” advises Adhil Shetty, CEO of BankBazaar.com. He emphasizes that even a small difference of 35-50 basis points warrants exploring refinancing options.
Proactive monitoring of market rates and negotiation with existing lenders can also yield considerable savings. While formal conversion processes may not always be available, banks may be open to lowering rates, especially if borrowers express an intent to switch. Non-banking financial companies (NBFCs) and housing finance companies (HFCs) often offer official conversion options for a nominal fee.
Real Savings from Rate Reduction: A Case Study
Consider a borrower with a Rs 75-lakh home loan on a 20-year tenure. A reduction in the interest rate from 9% to 8.75% after three years results in:
- A total interest savings of Rs 4.97 lakh.
- Loan closure seven months earlier than the original term.
If the rate drop occurs after just two years, the borrower could save Rs 5.8 lakh and close the loan eight months earlier. The impact of refinancing and rate cuts can be substantial in reducing the financial burden on borrowers.
Insights from Real Estate Industry Experts
Industry leaders predict that the rate cut will stimulate home sales and improve affordability:
- Yashank Wason, MD of Royal Green Realty, highlights that homebuyers will benefit from reduced EMIs, making refinancing more attractive.
- Rajat Khandelwal, CEO of Tribeca Developers, notes that lower borrowing costs enhance buyer confidence, particularly in premium markets like Mumbai (MMR), NCR, and Pune.
- Anuj Puri, Chairman of ANAROCK Group, acknowledges that while the repo rate cut and recent tax benefits will encourage first-time homebuyers, rising property prices could offset some advantages.
- Manik Malik, CFO of BPTP, emphasizes that this move will enhance investor confidence and stabilize property values.
Leveraging the Tax Cuts and Rate Reduction for Maximum Benefit
The Budget 2025 announcement making income up to Rs 12 lakh tax-free under the new regime, coupled with a standard deduction of Rs 75,000, further enhances the financial position of salaried individuals. By channeling these savings towards partial prepayments on home loans, borrowers can reduce their principal faster and save substantially on interest.
Partial Prepayments: A Smart Strategy
With increased savings from the repo rate cut and tax benefits, salaried individuals can make strategic partial prepayments on their home loans. Even small, consistent contributions can significantly reduce the principal amount and save lakhs in interest over the long term. Utilizing annual bonuses and making partial prepayment a regular habit can optimize loan management and maximize savings.
Commercial Real Estate and REITs
The rate cut may also have positive implications for commercial real estate, as lower borrowing costs can encourage business investment in office spaces. Additionally, Real Estate Investment Trusts (REITs) could become more attractive to investors seeking stable returns in a lower-rate environment.
Timely Transmission of Benefits
While the rate cut is undoubtedly positive, its effectiveness depends on how quickly and fully banks pass on the benefits to borrowers. Delays in rate adjustments could mean that borrowers won’t see immediate relief. The eventual impact will also depend on how inflation affects property prices in the coming months.