Banks haven’t reduced home loan interest rates even though the Reserve Bank of India, the Central Bank in India, has cut benchmark interest rates several times. As of 3rd June 2019, the RBI repo rate was 6%. The repo rate was 6.50% on 5th December 2018 and 6.25% as of 7th February 2019.
A cut in repo rates means banks must reduce MCLR rate, which stands for Marginal Cost of Funds based Lending Rate. MCLR is the minimum rate below which banks don’t lend. The monetary policy of the RBI boosts economic growth and controls inflation in India.
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See Also: Home Loan EMI Calculator
While the RBI has cut repo rate by 50 bps in the last few months, most banks have decreased MCLR by just 5-10 bps. Why?
See Also: Tips For Home Loan EMI Repayment
If you are buying a house, find your own strategy to reduce EMIs as banks are not interested in cutting home loan interest rates. If you are a first-time loan seeker, get the lowest rate by approaching several banks. If you have already availed a home loan:
See Also: Mortgage Loan Calculator
If you have surplus funds, you may choose to prepay the home loan. Prepayments are useful and help reduce the home loan interest rate burden. If you have availed a home loan of Rs 40 Lakh for 15 years at an interest rate of 9.65%, the EMI and the overall interest payment come to around Rs 42,131 and Rs 35.83 Lakh respectively.
If you prepay Rs 10,000 a month for the first 3 years along with your regular EMIs, the total interest outflow falls by Rs 8 Lakh which is a huge saving. The home loan tenure reduces to 12.75 years from 15 years. The funds for prepayment can be arranged if you spend wisely. Consider various factors like income from other sources or investments, home loan interest rates, tax deduction and prepayment charges before making prepayments.
See Also: Home Loan Interest Rates
Prepaying helps save on home loan interest rates. But, you have to consider the opportunity cost. For instance, if you spare Rs 10,000 a month on prepayment, the opportunity cost of Rs 10,000 is the returns you could have earned, elsewhere. Loan rates are normally higher than interest on fixed income securities and equity investments are high risk. Prepaying is a wise idea.
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