Significant Repo Rate Reduction by RBI
On June 6, the Reserve Bank of India (RBI) made a notable decision during its Monetary Policy Committee (MPC) meeting by reducing the repo rate by 0.50%. This move is a boon for home loan borrowers, following previous cuts of 25 basis points each in February and April. Cumulatively, this year has seen a total reduction of 1% in the repo rate. Most home loans are linked to floating rates from banks, which means any decrease in the repo rate directly impacts the interest rates on home loans.
Options for Borrowers with Reduced Interest Rates
When interest rates on home loans decrease, banks typically offer borrowers two choices: either to lower their EMI while keeping the loan tenure unchanged or to maintain the EMI and shorten the loan tenure. Both options allow borrowers to save on interest, although the amount saved will vary. If borrowers opt for a reduced EMI after the rate cut, they will not only see a decrease in their monthly payments but also a significant reduction in the total interest paid over the loan's duration.
Potential Savings from the Rate Cut
The actual savings depend on whether borrowers choose to lower their EMI or keep it stable while reducing the loan tenure. With banks now starting to lower interest rates on home loans, many borrowers are eager to understand how much they can save. For instance, if a borrower has taken a loan of ₹50 lakhs, they could save over ₹7 lakhs. Let's explore how this works.
Savings by Reducing EMI
Assuming a borrower took a ₹50 lakh loan for 20 years at an interest rate of 9.5%, their EMI would be ₹46,607. Over the full term, the total payment would amount to ₹1,11,85,574. With the recent 1% reduction in interest rates, the new rate stands at 8.5%, bringing the EMI down to ₹43,391. Consequently, the total interest would decrease to ₹54,13,879, resulting in a total payment of ₹1,04,13,879. This translates to savings of ₹7.71 lakhs over the life of the loan.
Savings by Reducing Loan Tenure
Alternatively, if borrowers choose to reduce the loan tenure instead of lowering their EMI, they could benefit even more. By maintaining the same EMI after the interest rate drop, the loan tenure could be shortened by approximately 3.16 years. This option could lead to savings of ₹17.65 lakhs in interest on a ₹50 lakh loan over 20 years, potentially allowing borrowers to save an additional ₹10 lakhs.
