Explained: Repo rate unchanged at 6.5%, worst over for home loan borrowers

The Reserve Bank of India on Thursday kept the key repo rate unchanged at 6.5 per cent, which means that if you have an existing home loan, a repo rate pause will not impact your Equated monthly installments ( EMI), but if you have a floating rate loan, you may benefit from the rate pause. 

"The cumulative rate hike of 250 basis points undertaken by the MPC is transmitting through the economy and its fuller impact should keep inflationary pressures contained in the coming months. Monetary policy would need to be carefully calibrated for alignment of inflation with the target. Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent.," RBI governor Shaktikanta Das said in a statement.

Interest rates appear to be stabilising

 

A repo rate pause signals that the RBI is maintaining a status quo until the economy improves substantially. This is good news for home loan borrowers as it signals that interest rates appear to be stabilising. 

Since May 2022, the central bank has increased the repo rate, the interest rate at which the RBI lends money to commercial banks,  by 250 bps over inflation concerns.  Changes in the repo rate affect various financial instruments, including home loans. Hence, in the last one year, a report rate hike of  2.5 per cent implies that the equated monthly installments (EMIs) for borrowers have gone up by approximately 16 per cent in case of a 15-year loan, 20 per cent in case of a 20-year loan, and 26.5 per cent in case of a 30-year loan.

Also read: Indian shares rise after RBI keeps repo rate unchanged at 6.5% in MPC meet

Those  who were paying a home loan interest rate of 6.75 per cent in April 2022, are now paying around 9.25 per cent as per the external benchmark lending rate (EBLR) norms. 

This means that those who had opted for a floating interest rate home loan, which is linked to the external benchmarked, had borne the brunt of the 2.5% rate  hike up until February 2023 because their home loan interests went up in tandem with the repo rate hike.  This resulted in lenders increasing the tenure of the loan. And when that wasn't feasible, banks increase the EMI amount. 

Stick to floating interest rates
 

For home loan borrowers, it is better to stick to their floating interest rate loans for now. "Fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, considering that rate cuts are expected a few quarters down the line, it makes sense to stick to floating rate loans," said Anshul Gupta, Co-founder and Chief Investment Officer, Wint Wealth.

 For example, if your current home loan rate floating interest rate is 9.5% per annum, you could get offers for 9.25% per annum fixed rate. But if you wait, even if rates fall by just 100 bps, your home loan rate would become 8.5%. Thus, converting to fixed-rate loans doesn’t make sense right now.

You can also refinance your loan 

Borrowers can also  compare the interest rate with the most competitive lenders in the market and check the difference. If the difference is 0.5% or more, it would be beneficial for you to switch to a better lender under ELBR.

Make partial or full-repayment of home loans now 
 

"The RBI keeping the repo rate paused at 6.50 is certainly a big breather for existing and prospective borrowers who were waiting for rising interest rates to settle. Borrowers who saw their loan tenures increased due to back-to-back hikes may now consider making partially or fully repayment of their loans as the repo rate remains unchanged," said Adhil Shetty, CEO, Bankbazaar.com.

 Shetty predicts that if inflation remains within the RBI's tolerance level, India can see home loan rates drop before the end of 2023. 

"If you’re on a repo-linked home loan, your rate should automatically reset after any repo rate change within a quarter. The lowest rates being offered in the home loan market today are in the 8.40 to 8.50 for eligible borrowers. If you’re paying a significantly higher rate, consider a refinance," he said. 

 If you’re able to shave off 50 basis points or more off your rate, it could lead to significant savings over the long term. 

When thinking about a home loan rate, also think of it in terms of the premium you pay over the repo. For example, at 8.50 per cent, the premium over the repo is 2 per cent. Prime borrowers with good credit histories and strong income credentials can borrow at the lowest premium while others will have to pay higher, said Shetty.

Unchanged repo rate will  help maintain momentun in housing sales

The unchanged repo rate can also help maintain the momentum in housing sales, which has so far been firing on all cylinders in 2023. "As per ANAROCK Research, we saw housing sales in first quarter of 2023 scale new heights, breaching the one lakh mark at 1.14 lakh units across the top 7 cities.

 Real estate loan demand from both housing and commercial segments has remained strong, despite a 150 bps rise in the base lending rate (MCLR) over the past year, said Shishir Baijal, Chairman and Managing Director, Knight Frank India

Given the current unchanged rates, the outlook for those looking to buy their first home via a home loan soon remains favourable. Interest rates from most banks will continue in single digits. With top banks, they currently hover between 8.7 to 9.65%. A future rate hike, if any, may push the rates into double digits," said Anuj Puri, Chairman – ANAROCK Group.

Wait another two quarter for rates to come down 

"With the continued pause in interest rate hike, home loan borrowers are looking at another two quarters before the rate starts dipping. In the meanwhile, any surplus money should be used to reduce the loan outstanding. In case you have multiple loans (home, car, personal), start with paying off the most expensive loan first," said Chaitali Dutta of Azuke Personal Finance Advisory. 

Here is a list of home loan rates being offered by India's financial instituions 

Note: Interest rates that vary with tenures or credit score within the specified loan amounts are indicated as a range. Fixed interest rates may be subject to a revision after a specified tenure. Rates may also apply only for a definite period and change to floating thereafter. Data taken from respective bank’s website as on Jun 02, 2023. Contributed by BankBazaar.com, an online marketplace for comparing loans and insurance products. *Annual percentage rate; ^as on 21 Apr 23

What should FD investors do?

For those sitting on the fence over picking the right fixed deposit, it is time to consider reinvesting your FDs for higher returns. Most banks provide rates of 7 per cent or more on select deposit tenors. Smaller banks are at 7.5 per cent and many small finance banks are above 8%. Senior citizens are being offered a premium of 25 to 75 basis points. Some government banks are offering super senior citizens (those above 80) additional premium. 

"For people who have deposits on FDs, the strategy remains that the highest interest rate is to be captured for the longest period available. In case, some of your older FDs are at lower interest rates, it is advisable to make premature withdrawal of these, and put into higher interest rate FDs which are currently available," said Dutta.