How To Get Maximum Benefit Of Repo-Rate Change: Should You Refinance Your Home Loan?

The Reserve Bank of India's decision to reduce the repo rate by 50 basis points to 5.5% in June has prompted some banks to revise their lending rates. This move, aimed at reviving economic momentum amid global trade headwinds, could have a direct impact on borrowers.

With many leading banks reducing their repo-linked lending rates and marginal cost of funds-based lending rates, the home loan EMIs have come down for existing borrowers. It could also be suitable for existing borrowers to explore the refinancing option for their housing finance loans.

The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks. A reduction in this rate usually lowers the cost of borrowing for banks. As the banks receive funds from the RBI at a cheaper rate, they often pass on the benefits to the customers by lowering the interest rates on loans.

The extent of this benefit for borrowers depends on how quickly and to what degree lenders adjust their interest rates. It's also important to note that the existing borrowers can benefit from a revision in the interest rates only in the case of floating-rate loans.

Following the repo rate cut in the June monetary policy review, some banks have already begun passing on the benefits to borrowers:

• Bank of Baroda: RLLR cut from 8.65% to 8.15%.

• Punjab National Bank and Bank of India: RLLRs brought down from 8.85% to 8.35%.

• Indian Bank: Adjusted RLLR from 8.7% to 8.2%.

• UCO Bank: RLLR down from 8.8% to 8.3%; MCLR trimmed by 10 basis points across tenures.

• SBI: Reduced RLLR by 50 basis points to 7.75%.

These rate revisions indicate a positive trend, particularly for borrowers with floating-rate home loans tied to the repo rate or other external benchmarks.

Repo rate adjustments have a direct effect on EMIs for floating-rate home loans. When the RBI changes the repo rate, banks often revise their lending rates accordingly. This leads to either an increase or a decrease in monthly EMIs.

For instance, let’s say your home loan is Rs 60 lakh over 20 years at 8.5% interest. Your EMI would be around Rs 52,000. If the interest rate rises to 9% due to a repo rate hike, your EMI could go up to around Rs 54,000. Alternatively, lenders may offer to keep EMIs unchanged by extending the loan tenure, which increases the total interest payable over time.

Banks and financial institutions usually inform borrowers about such changes so they can plan their loan repayment better.

While the RBI's rate cut presents an opportunity for lower borrowing costs, the real benefit depends on individual lenders' willingness to pass on the benefit to the customers. Existing borrowers should review their loan terms and monitor how their bank reacts to the repo rate revision.

If your home loan interest rate remains unchanged in the coming weeks, it may be time to compare offers and evaluate the merits of refinancing. As the lending environment shifts towards lower rates, proactive financial planning can make a significant difference in your long-term savings.