On 27th March 2020, the Reserve Bank of India reduced the repo rate by 75 bps (basis points) as a measure to protect the economy from the ravaging impacts of the Coronavirus lockdown. Following this announcement, there has been plenty of speculation among existing home loan borrowers as well as future home loan borrowers on whether – mortgage rates are going down in 2020.
Here, in this guide, we analyse the relation between RBI repo rates and its impact on home loan borrowers, to help you understand how this rate cut will benefit the borrower.
What’s changing in the latest RBI Rate Cut?
The RBI reduced the repo rate by 75 bps at the end of March. Note that bps (one basis point) equals to 1/100th of a percentage. As a result of this latest rate cut, the repo rate was reduced to 4.40% from the earlier 5.15%. When compared with the repo rates of last year (6.25%), the rates have been slashed significantly this year.
What does this latest rate cut mean for the customer?
To understand this question, let's understand the relation between RBI rates, bank lending rates, and borrowers. First, let's get the terminology sorted.
Repo Rate: It is the interest rate at which RBI lends money to commercial banks. When the RBI reduces the repo rate, it means that banks can borrow money from RBI at a lower interest rate. Right now, the Repo rate stands at 4.40%. It means banks the interest rate the RBI charges banks is 4.40%.
When RBI reduces the repo rate, banks usually pass on this benefit to customers. They do so by lowering the interest rates for various loans they offer, including big-ticket loans like home loans. As a result, existing borrowers on floating rate loans and new borrowers can see a reduction in the interest rates of loans.
How does this help the end customer?
Lower interest rate translates to an overall reduction in the money you owe the bank. This, in turn, reduces EMIs, bringing down the total cost of the loan.
Does that mean mortgage rates are going down in 2020?
Yes. You can expect banks to reduce the lending rates for various loans like home loans, car loans, personal loans, small business loans, etc. However, note that not all banks pass on the benefits to customers.
A study conducted by the IMF (International Monetary Fund) found that commercial banks in India were slow in passing the benefits to customers when the RBI reduced repo rates. Though banks usually decrease the interest rates earned by fixed deposits, recurring deposits, and savings bank accounts, they take time reflecting the changes in lending interest rates. Similarly, when interest rates increase, banks are quick to raise lending rates, while deposit rates do not change fast.
Further note that a reduction in interest rates will happen only for floating-rate home loans and new home loans. If you have availed a fixed-rate home loan, then you will not be impacted by these changes.
Compare Interest Rates to benefit from the Reduction in Repo Rates in 2020
With the RBI reducing repo rates to ease the financial crisis caused by the Coronavirus, home loan rates are likely to go down in 2020. However, it remains to be seen how soon and which banks will pass on these benefits to customers.
So, if you're looking to benefit from the latest reduction in repo rates by the RBI, make sure to shop around before you apply for a home loan in 2020. Also, if you're stuck in a high-rate fixed-interest home loan, it's time to consider refinancing to switch from a fixed-rate home loan to a floating-rate home loan.
As always, use CreditMantri to compare interest rates on home loans offered by different banks to select the best deal that works for you.