Repo rate slash: happy news for home buyers
June 25, 2019
What is repo rate?
Repo rate is the rate at which the RBI lends money to commercial banks in the event of a shortage.How does it matter to home buyers?
A major section of the society still purchases homes on EMI. So as the interest rate at which the RBI lends money to banks goes down (or the repo rate reduces) it may bring down the EMI for some customers.
What is the latest news on it?
Reserve Bank of India in its Second Bi-monthly Monetary Policy Statement for 2019-20 has cut the repo rate by 25 basis points, which now stands at 5.75%. Before this rate cut, the RBI has already cut rates by 50 basis points in the calendar year 2019. So now with the latest rate cut, the repo rate is down by a whopping 75 basis points since January 2019.
How is the home loan impacted?
While it’s still early to analyze the impact of this decision on homeowners, there are some positive effects that are already making waves in home rates and sales. Due to lesser repo rates, banks lower their respective Marginal Cost of Funds based Lending Rates (MCLR), which in turn impacts home loan in a positive manner. For existing homeowners, the impact of EMI would be slower due to the reset date factor.
Let’s see this with an example?
Take a consolidated 1 per cent fall in bank’s MCLR over 12 months. Assume the home loan interest rate also comes down by an equal margin.
@9% home loan, the EMI on Rs 1 lakh loan for 15 years = Rs 1,014
If the rate falls by 100 basis points i.e. 1%, the EMI = Rs 956
A difference of Rs 58 or about 6% fall
Similarly, if the rate falls by 1% on a Rs 30-lakh loan, the saving on EMI = Rs 1758
Lower MCLR = Lower home loan interest rate = Low-interest burden (other factors constant)
Thus, for interested home buyers, the repo rate cut comes as a welcome change, and a hope to finally own that dream home.