Know How the RBI Rate Cut Can Affect Your Housing Loan EMI

Anamika Verma
3 min readOct 31, 2019

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The Reserve Bank of India has cut a total of 110 basis points in the repo rate since the last fiscal. It was only during the last bi-monthly monetary policy that the rate was finally pegged at 5.40% after 4 consecutive rate cuts. The current repo rate is supposedly the lowest in this decade since 2010.

However, these cuts in repo rates have a direct impact on the lending abilities of all the financial institutions. The most significant impact is on the home loan EMI as the lending institutions are able to lend to the customers at lower interest rates.

The link between rate cut and low EMI

The link between rate cut and EMI can be explained through the concept of monetary policy by RBI. Herein, the central bank sets a lending rate that determines the MCLR. Financial institutions borrow money from the RBI at the MCLR which is also the minimum rate at which they can extend loans to their customers.

Lenders extend loans to borrowers after allotting a certain increase on the MCLR at which they borrowed funds from the RBI. This increased rate is known as the spread.

If the lending rate or MCLR increases, there is a significant increase in the lending rate of financial institutions as well. As a result of increased interest rates, the amount of EMI for a home loan also increases in comparison to a lower rate of interest. Use a loan EMI calculator to calculate the difference between interest rates applicable on a home loan 3 years prior to today to find out the difference in EMI.

Note that an RBI rate cut affects all loan interest rates. Secured loans are offered at the lowest home loan interest rates in comparison to unsecured advances.

Also, in the case of home loans on floating rates of interest, the rate and the subsequent EMIs vary according to RBI rate cuts.

EMI payments after cut in repo rate

After the rate cut, as already mentioned, a borrower is likely to pay a comparatively lesser amount as EMI courtesy lowered interest rates. Therefore, it is important to assess the lending rates before opting for a home loan and checking the applicable home loan EMIs.

Other than rate cuts, there are multiple things you should know before availing a home loan. These pointers can just as effectively determine the interest rate you will be offered when you apply for a home loan.

Firstly, check the eligibility criteria to successfully apply for the loan. Although the criteria vary between lenders, the basic requirements include –

  • Only an Indian resident can avail home loans from any financial institutions or NBFC irrespective of whether functioning under RBI.
  • The borrower should be between 23 and 62 years of age.
  • Loan amount based on whether you are self-employed or salaried individual.

After passing through the eligibility calculator, you should also possess the following documents to avail a home loan –

  • Address proof.
  • Identity proof.
  • Passport-sized photograph.
  • Salary slips from the employer or account statement of your business.
  • Documented proof of business.

Hence, before availing a housing loan, it is advisable to check whether you fulfill their eligibility criteria.

Other than rate cuts, there are certain RBI guidelines for home loans that you should know about as a prospective borrower and realty buyer. Refer to leading lenders for the most repayment-friendly terms and benefits. Choose between fixed and floating rates to best benefit from lower or higher RBI rates respectively.

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Anamika Verma
Anamika Verma

Written by Anamika Verma

She writes various types of tutorial related to finance and has a vast experience as a financial adviser.

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