RBI has kept the repo rate unchanged at 5.15%. After October 1st 2019 home loans offered by banks are linked to an external benchmark. (This is the RBI repo rate). Keeping the repo rate unchanged brings a lot of relief to home loan borrowers. If you have availed a home loan, you must be curious to know what happens to home loan rates.
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If your home loan is linked to an external benchmark like repo rate, you end up paying the same amount of EMIs. (This is because repo rate remains unchanged). Home loan rates reduce only if there’s a reduction in margin (spread) by the bank.
See Also: How to Switch to Repo-Linked Home Loan?
From February 2019, RBI has cut repo rate 5 times by a total of 135 bps. Banks have also cut interest rates. But, the quantum is less as compared to the repo rate cuts. From February 2019 to January 2020 banks have reduced MCLR by 65 bps.
The impact of the MCLR reduction will be felt only once home loan reset date arrives. MCLR-linked home loans have a reset period of 6 months or a year. Under MCLR-regime, home loan rates are revised only on reset dates. Even if bank cuts MCLR-rates, you enjoy benefits of home loan rate cuts, only on reset dates.
You can switch from MCLR Home Loan to External Benchmark, but incur administrative charges. Make the change only if interest rate differential is 0.5% or more. Do remember that under the benchmark loan rate, you experience higher volatility. You may need a high salary to manage home loan EMIs.
Let’s understand MCLR Home Loan with an example. We assume that ICICI 1-Year MCLR has fallen from 8.8% in January 2019 to 8.2% in January 2020. This is a 60 bps cut. How does this impact home loan EMIs and total interest cost?
Now let’s say you have a home loan of Rs 35 Lakhs with tenure of 15 years. You will save Rs 1,231 in Home Loan EMIs and total interest saved is Rs 2.21 Lakhs.
New borrowers can look at external benchmark home loans. If the RBI cuts repo rate in the future, home loan rates will come down. So, it’s best to opt for repo-linked home loan. Whether you avail repo-linked home loans or MCLR home loans, look to prepay as fast as possible. This is one of the best ways to get rid of a home loan. Do a cost-benefit analysis on the tax benefits before prepaying the home loan.
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