Home loan interest rates and equated monthly installments (EMIs) will remain unchanged for borrowers as the Reserve Bank of India (RBI) decided to maintain the repo rate steady at 6.5 percent for the eighth consecutive time on June 7.
Since October 1, 2019, banks have linked all retail floating-rate loans to an external benchmark, mainly the repo rate. Consequently, any alterations in the repo rate directly impact the interest rates on these loans.
However, the wait for lower rates continues for borrowers. Many economists anticipate the RBI to commence rate cuts only in the latter half of FY 2024-25, after inflation cools down to a level within the RBI’s comfort zone. Consequently, existing borrowers may have to endure higher interest rates for several more months.
Inflation persists above the RBI’s four-percent target, with India’s consumer price index (CPI)-based inflation easing to an 11-month low of 4.83 percent in April. Nonetheless, food inflation remains a concern, remaining high at 8.7 percent.
Around 2021 and 2022, when the repo rate was four percent, the lowest rates in the market hovered around 6.5 percent, suggesting a spread of 2.5 percent over the repo rate. Borrowers from that period have the option of switching to other lenders offering narrower spreads and lower interest rates to save on interest costs.
New borrowers should seek loans with the narrowest spreads available. This year, HDFC Bank raised home loan rates for new borrowers by 40 basis points (bps) despite steady repo rates. Other banks, including the State Bank of India (SBI) and Bank of India, have also raised their effective new home loan rates by 10 bps.
Experts attribute this rate hike to liquidity issues, impacting not only HDFC Bank but other banks as well. Therefore, new home loan borrowers should seek banks offering loans with the narrowest possible spread to reduce their overall interest expenses.
Additionally, borrowers could consider making part-prepayments from their savings and investments to lower their interest burden. Strategically allocating a portion of annual bonuses to prepay housing loans can significantly reduce interest payouts over the long term.
Opportunities exist for borrowers to switch lenders, particularly those whose home loans are linked to older benchmarks like the marginal cost of funds-based lending rate (MCLR) and base rate. Switching to lower rates offered by banks or housing finance companies (HFCs) can result in substantial savings in interest payments.
