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RBI’s Rate Cut: How It Makes Home Loans More Affordable for Borrowers
To boost economic growth, the Reserve Bank of India's (RBI) Monetary Policy Committee announced a 25-basis-point cut in the repo rate to 6.25% on February 7, 2025. Marking the first rate reduction in nearly five years, this decision is expected to lower Equated Monthly Installments (EMIs) for home loan borrowers, making borrowing and spending more accessible and affordable for individuals and businesses alike.
Impact on Home Loan EMIs
The repo rate is the interest rate at which Commercial Banks borrow money from the Reserve Bank of India (RBI). When the repo rate decreases, banks typically reduce their lending rates, making home loans more affordable for consumers. This reduction in lending rates automatically lowers the Equated Monthly Installments (EMIs) for both new and existing home buyers.
For instance, consider a home loan of ₹50 lakh with an interest rate of 8.5% over 20 years. The EMI would have been ₹43,059. However, with the new rate of 8.25%, the EMI drops to ₹42,452, resulting in a monthly saving of ₹607 and an annual saving of ₹7,284.
According to Adhil Shetty, CEO of BankBazaar, a 25 basis point cut in the repo rate can lead to significant savings. For a ₹50 lakh loan taken for 20 years at an interest rate of 8.75% with 12 EMIs paid by March, the interest outgo would decrease by ₹8,417 per lakh. This translates to a saving of ₹4.20 lakh over the loan tenure and a reduction of 10 EMIs
Benefits for Borrowers
The reduction in repo rate brings several advantages to borrowers:
Lower EMIs: With a decrease in interest rates, EMIs are reduced, easing the financial burden on homeowners and providing them with more disposable income.
Refinancing Opportunities: Existing borrowers can explore refinancing options, taking advantage of lower interest rates to save substantial amounts over the loan tenure.
Enhanced Affordability: Reduced borrowing costs increase affordability, encouraging more individuals to enter the housing market and realize their dream of owning a home.
Expert Views
Industry experts predict that the repo rate cut will boost home sales by increasing affordability. According to Yashank Wason, Managing Director of Royal Green Realty, "The reduction in EMIs and easier refinancing options will undoubtedly favor homebuyers, making it an opportune time to invest in real estate."
Rajat Khandelwal, Group CEO of Tribeca Developers, echoes this sentiment, stating, "Lower borrowing costs not only enhance financial predictability but also drive consumer confidence, leading to better consumption patterns and sustained growth momentum in the real estate sector."
Manju Yagnik, Vice Chairperson of Nahar Group and Senior Vice President of NAREDCO - Maharashtra, adds that the low home loan interest rates will bring much-needed relief to homebuyers, reducing the overall cost of property purchase and making homeownership more accessible.
Cautions and Considerations
While the repo rate cut is expected to boost the economy, there are several factors to consider:
- Bank Transmission: The effectiveness of the rate cut depends on how quickly and fully banks pass on the benefits to borrowers.
- Loan Type: Borrowers with floating-rate home loans or new loans will benefit immediately, while those with fixed-rate loans will need to refinance to take advantage of the lower rates.
- Inflation and Property Prices: Rising inflation could lead to higher property prices, offsetting some of the gains from the rate cut.
- Reset Dates: Existing borrowers may not see the benefits of the rate cut until their loan's reset date, which could be six or twelve months away.
Impact on Real Estate Industry
- The repo rate cut is expected to have a positive impact on the real estate sector:
- Fresh demand will be generated in the housing market.
- Businesses will be incentivized to invest in commercial property.
- Real Estate Investment Trusts (REITs) may attract investors seeking stable returns in a low-interest-rate environment.
Conclusion
RBI's decision to cut the repo rate by 25 basis points to 6.25% is expected to bring relief to home loan borrowers, making EMIs more affordable and boosting demand in the real estate sector. With lower interest rates, borrowers can enjoy significant savings, and the housing market may see a surge in fresh demand.
However, the impact of the rate cut will depend on how quickly banks transmit the benefits to borrowers. Overall, this move is a welcome step towards making homeownership more accessible and affordable for individuals and businesses alike.