RBI Rate Cut Impact: How Much You Will Save On Home Loan EMI For Rs 30 Lakh Over 20 Years?
The decision to lower the repo rate by the Reserve Bank of India to 6.25% came as a shocking policy decision and is likely to benefit existing and new home loan borrowers. This change also brings benefits to the working class. It is normal banking practice that banks, in response to a decrease in the repo rate, will try to lower interest rates on loans. A borrower taking a home loan of Rs 30 lakh above 20 years, with even a nominal reduction in interest rates, ends up saving a significant amount over the term of the loan. But how much will you actually save if you have a Rs 30 lakh home loan for 20 years? Let's break it down in detail.
Now take the example of Indian banks which have more than 150 branches and all these banks are willing to cut interest rates by 25 basis points or 0.25%. The math becomes incredibly simple. Before the cut, the interest rate of Rs 30 lakh loan of 20 years (240 months) with fixed interest rate EMIs was at 8.50% (before rate cut). This meant that for a total interest paid over 20 years of Rs 32,48,407, the total EMI was Rs 26,035. When the interest was reduced to 8.25% (after repo rate cut), the EMI shifted down to Rs 25,526 bringing down the total interest to 31,26,232. Resulting in an increase in savings of Rs 1,22,175 over 20 years, which results in a saving of Rs 509 per month.
Before Rate Cut (8.5%): EMI Approx. Rs 26,035 per month After Rate Cut (8.25%): EMI Approx. Rs 25,526 per month Monthly Savings: Around Rs 509 Total Savings Over 20 Years: Rs 1.2 lakh
What Does This Mean for Borrowers? For borrowers considering a home loan or for those with outstanding loans, this rate cut offers a multitude of new opportunities. Fresh borrowers stand to gain from lower Phase In EMIs, reduced relativity income ratios, and improved lending status. There are options such as seeking refinancing loans, negotiating with the present lenders, or balance transfers that existing borrowers can use. The cut has the potential to re-energize the temperate housing market, especially in affordable and mid-range segments. If the banks pass these benefits of rate cuts in the coming months, real estate activity will definitely increase in the property market.
What Does This Mean for Borrowers? For borrowers considering a home loan or for those with outstanding loans, this rate cut offers a multitude of new opportunities. Fresh borrowers stand to gain from lower Phase In EMIs, reduced relativity income ratios, and improved lending status. There are options such as seeking refinancing loans, negotiating with the present lenders, or balance transfers that existing borrowers can use. The cut has the potential to re-energize the temperate housing market, especially in affordable and mid-range segments. If the banks pass these benefits of rate cuts in the coming months, real estate activity will definitely increase in the property market.
Sandeep Mangla, the Managing Director of Forteasia Realty Pvt. Ltd, speaks from a practical standpoint when it comes to the impact of the rate cut: "The effects will not be felt immediately; they will begin to manifest two to three months from now as banks change their lending rates. However, even an elementary reduction of twenty-five basis points can have significant impacts on home loan repayments. For most standard home loans, borrowers should be able to reduce their monthly EMIs by hundreds of rupees as there will be substantial savings.
Should You Refinance Your Home Loan? The rate cut is likely to have an impact on both the demand and supply aspects of the real estate market. In addition to making home loans more accessible to potential buyers, lower rates also reduce construction costs for the developers. Gaurav Kansal, Director of KBP Group states, "This rate cut is beneficial to the real estate sector and comes at a propitious time. We expect a surge of activity in the affordable and mid-housing segments as consumers are very price-sensitive with regard to changes in EMI. Not only will the reduced rate help end-users, but it will also assist in enabling developers to finance construction using more affordable rates, allowing for even greater competition."
This reduction in rates is expected to affect far more than just the immediate decrease in EMIs. The lower interest rates are likely to have an impact on the overall property affordability, buyer sentiment and their decision-making, project completion timelines, and the liquidity in the property market. Insights from Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited, help clarify, "We are witnessing what we term as a 'trigger effect' whereby this reduction in rate is encouraging previously reluctant purchasers in primary home ownership tertiary markets - particularly those in their 30s to 40s to the market. The trigger effect works across the entire construction value chain. Developers stand to gain a reduction in project cost by 1-2 percent which has been shown to improve affordability at the lower end of the market."
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