Since February last year, the Reserve Bank of India has cumulatively decreased the repo rate by a whopping 250 bps (100 bps = 1%), causing it to fall from 6.5% to 4%. The astronomical and historical cuts by the Monetary Policy Committee (MPC) of RBI have come amid a struggling economy and unprecedented financial crisis.
Further, owing to the repo rate being linked to interest rates over the past year in the Indian financial market, borrowers are significantly to benefit from these cuts. It primarily holds in case of mortgage loan borrowers, as any reduction in current home loan interest rate would result in significant saving by virtue of this credit facility being a large-ticket loan.
Future of Housing Loan Rates in the Future
The Monetary Policy Committee has slashed the repo rate by 40 bps on 23rd May 2020, causing it to go down from 4.4% to 4%. It comes amid a grave economic condition brought about by an extended lockdown, albeit it witnessing calibrated relaxations.
RBI has cleared its stance in this situation stating it would take any number of measures to revive the economic growth and that capitally includes reviving the real estate sector. Therefore, via such drastic repo rate cuts as well as a reduction in reverse repo rate and CRR, it aims to increase liquidity and improve the purchasing power of individuals.
Furthermore, financial experts speculate that the effects of such repo rate cuts would not be lost on home loan interest rates even after economic activities go back to normal. The primary reason being economists believe such low rates on a big-ticket loan such as home loan would continue encouraging individuals into availing these, expecting a snowball effect on the real estate sector.
Nevertheless, irrespective of the significance of the repo rate, it is not the only factor that has a bearing on the interest rates of home loans.
Factors that Influence Home Loan Interest Rates
Individuals ought to note that while the repo rate cuts do aid in the reduction of interest rates, it is an external agency over which borrowers have no control. Therefore, borrowers, both prospective and existing, should adopt certain measures to ensure restricted interest outgo. The tips to decrease home loan interest are as follows –
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Opt for a shorter tenor
The repayment tenor for a home loan has a significant bearing on the interest outgo; it is a long-term credit facility with tenor ranging for up to 20 years. A long loan tenor results in a higher interest outgo due to prolonged accrual.
Ergo, individuals might consider opting for a shorter tenor when applying. That way, they can bring down their total interest payment considerably. Existing customers can also trim their home loan tenor by adopting specific measures like increasing the EMI.
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Make prepayments
It is crucial to understand the amortisation schedule for a home loan. In the initial stages, EMIs consist largely of interest and the opposite is true in the later stages. Therefore, individuals can make part prepayments in the initial years to lower the principal component as well that will, in turn, decrease the interest outgo.
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Improve the CIBIL score
The credit score is the quintessential determinant of interest rates on credit facilities. Therefore, individuals should consider effective ways to enhance their credit score to improve their home loan eligibility. It will, in turn, provide them with the grounds to negotiate for a lower interest rate on home loans.
In addition to the pointers mentioned above, individuals must be thorough in their research when looking to apply for a home loan. It would allow them to fetch affordable home loan interest rate as well as convenience of service.
Regardless, these times of economic crisis might potentially be beneficial for scores of home loan borrowers owing to the multiple benefits extended by lenders as well RBI. They can tap into this opportunity to secure home loans at a 15-year low rate, thus, significantly reducing the cost of a loan.
