The interest burden on your home loan and the equated monthly instalments (EMI) will stay the same for the time being since the Reserve Bank of India (RBI) has decided to maintain the repo rate at 6.5 percent for the seventh consecutive time, with the announcement made in April first week.
The central bank’s approach demonstrates thoughtful evaluation of strong economic indicators, taking into account variables like monsoon outcomes, decisions by the US Federal Reserve, and overall economic expansion. This ensures that the country’s growth prospects remain promising and sustained.
Starting from October 1, 2019, banks have connected variable-rate retail loans to an external benchmark, typically the repo rate. Consequently, alterations in the repo rate directly impact the interest rates applicable to these loans.
The anticipation for reduced rates persists. A steady repo rate indicates a consistent interest rate environment for borrowers. This assurance is particularly advantageous for homebuyers, ensuring stability in loan interest rates, which benefits both new loans and existing ones with variable rates.
Current borrowers will need to manage with elevated interest rates for a few additional months. Economists anticipate that inflation will decrease to levels within the RBI’s preferred range, leading to a potential reduction in rates. RBI Governor Shaktikanta Das noted in April first week that inflation remains higher than the targeted 4 percent.
During the years 2021 and 2022, the market’s minimum rates hovered around 6.5 percent, aligning with a repo rate of 4 percent, indicating a margin of 2.5 percent above the repo rate. Borrowers during that period have the opportunity to switch to lenders offering reduced spreads and lower interest rates, thereby saving on interest expenses.
New borrowers should actively search for the most minimal spread available. HDFC Bank has raised home loan rates for new customers by 35 basis points (bps) this year, even though the repo rates have remained stable. One basis point equals one-hundredth of a percentage point. In January, the lowest interest rate on Rs 50 lakh home loan at HDFC Bank was 8.35 percent, while currently, the lowest rate stands at 8.70 percent.
As per report, both Axis Bank and Karur Vysya Bank have increased their effective new home loan rates by 5 basis points (bps). In January, the lowest home loan rates for Rs 50-lakh loan at Axis Bank and Karur Vysya Bank were 8.70 percent and 8.95 percent, respectively. However, starting from March, these rates rose to 8.75 percent at Axis Bank and 9 percent at Karur Vysya Bank.
The increase in interest rates has been linked by financial experts to liquidity challenges, impacting not just HDFC Bank but other institutions too. Therefore, new home loan seekers should search for lenders offering loans with the smallest spread possible. Doing so will help minimize the interest payments.
To lessen your interest expenses, you might think about using some of your savings and investments to make a partial prepayment on your loan. Even a modest additional sum each month could lead to a considerable reduction in your overall interest payment in the future.
An effective approach is to allocate a portion of your yearly bonus specifically for making annual prepayments towards your home loan.
In the current situation, there are chances to change your lender as multiple banks are providing home loans with starting rates approximately at 8.5 percent.
This is particularly crucial for borrowers with government banks, as a significant portion of loans still follow older benchmarks like the marginal cost of funds based lending rate (MCLR) and base rate. These benchmarks may have slightly higher interest rates compared to the repo-linked loans available now. Refinancing within one’s own bank is straightforward and cost-effective but has the potential to save borrowers significant amounts, possibly amounting to lakhs.
In conclusion, while the Reserve Bank of India’s decision to maintain the repo rate brings stability to the interest rate environment, borrowers should remain vigilant and explore options for minimizing interest expenses. New borrowers should seek lenders offering competitive rates, considering the recent uptick in home loan interest rates among some banks. Additionally, existing borrowers can leverage prepayment strategies and consider refinancing options to optimize their loan terms and save on interest payments over time.
