Repo Rate Cut Explained: Impact On Home Loans And Debt Reduction Strategies

Currently, the lowest home loan rates available in the market hover between 8.10 to 8.35 per cent, offered to borrowers with great credit scores above 750 and those refinancing their existing loans.

When taking a new loan or refinancing, try to negotiate for a lower spread, as this can lead to lower interest payments, especially when rates fall.

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The RBI Monetary Policy Committee concluded their 3-day review earlier today, bringing some good news for homebuyers! The central bank has reduced the repo rate by 25 basis points. The latest repo rate now stands at 6.00 per cent and is expected to reduce home loan interest rates to 8 per cent and below.

Currently, the lowest home loan rates available in the market hover between 8.10 per cent and 8.35 per cent, offered to borrowers with excellent credit scores above 750 and those refinancing their existing loans.

The drop in the repo rate is expected to ease borrowing costs. But lower rates alone won’t reduce your debt. To make the most of this rate cut and manage your home loan effectively, here are a four effective repayment strategies you should consider. 

Know Your Loan's Benchmark

Home loans are linked to a benchmark rate. Newer loans (after October 2019) use the repo rate, which allows for quicker adjustments to interest changes. However, nearly 50 per cent of floating rate loans with government banks are on MCLR, and 2 per cent are on the even older Base Rate, which may not reflect rate cuts as swiftly due to longer reset periods. So, check your loan's benchmark – switching to a repo-linked loan could mean faster benefits from rate cuts.

Switch To A Lower Spread

The "spread" is an additional percentage your bank adds to the benchmark rate to determine your final interest rate. When taking a new loan or refinancing, try to negotiate for a lower spread, as this can lead to lower interest payments, especially when rates fall. For example, if the repo rate falls to 5 per cent, someone with a 1.85 per cent spread pays 6.85 per cent interest, while another with a 2.65 per cent spread pays 7.65 per cent, resulting in higher monthly payments.

Refinance For Better Rates

If you're currently paying a home loan interest rate that's significantly higher (0.5 per cent or more) than the prevailing rates, consider refinancing to benefit from the lower rates now available. Approaching your current lender may be simpler and cheaper. If not, explore other banks, but calculate to ensure that the potential savings outweigh any refinancing costs. Refinancing can significantly reduce your interest costs.

Consider Prepayment

If you have extra funds, even small prepayments can help reduce your overall debt and shorten your loan tenure. Putting in a lump sum or increasing your EMI can save you a considerable amount on interest over time. If your interest rate feels very high, even exploring a full loan repayment might be worthwhile if your finances allow.

While past rate hikes may have strained borrowers’ finances, today's cut offers an opportunity to ease that burden. However, it is important to understand the effect of this change on your home loan. It is also equally important that you understand the various repayment strategies, like prepayment and refinancing that can help you reduce your debt burden and help you achieve financial freedom sooner.

(The author is the Senior Manager-Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)