Lending Rates: RBI Maintains Status Quo on Interest Rates: What Should Borrowers of Home Loans, Car Loans, and Personal Loans Do Now?
RBI keeps key interest rate unchanged for the 8th time in a row; maintains responsive demeanor
The RBI’s Monetary Policy Committee (MPC) decided to keep policy rates unchanged, Governor Shaktikanta Das said, and announced the outcome of the three-day bimonthly review on Friday. That said the MPC voted to keep the repo rate unchanged at 4% and maintain its accommodative stance to support growth. The reverse repo rate also remains unchanged at 3.35%.
With the RBI maintaining the status quo, banks will most likely not raise lending rates anytime soon. Additionally, in view of the festivities, most lenders have special lower interest rates and many other offers for borrowers – home loans are offered at rates as low as 6.5-6.7%. This gives borrowers one last window to avail of one of the lowest interest rates on home, auto and personal loans before interest rates rise again.
At its bimonthly monetary policy review meeting on October 8, 2021, the repo rate and the reversal rate will remain at 4% and 3.35%, respectively. This is the ninth straight monetary policy review meeting since the last change in May 2020 when the central bank decided not to tinker the interest rate. The current repo rate of 4% is the lowest since April 2001.
Here’s a look at how existing borrowers and those looking to take out a new loan (be it a home loan, a car loan, or a personal loan) can take advantage of the RBI’s break.
What should home loan borrowers be aware of?
The interest rate is the most important factor that determines how much you will pay for your borrowing, that is, your loan. Since home loans are the longest term loan for most borrowers, any change in the interest rate will have a significant impact on the total interest payment over the remainder of the loan term.
More time for new borrowers: Most home loans have floating interest rates. Since October 1, 2019, RBI had stipulated that all floating-rate retail loans from banks should be linked to an external benchmark such as the repo rate. Most banks have used the repo rate as a benchmark for their home loans. With the repo rate at its lowest level in two decades, a continuation of the low interest rate regime bodes well for borrowers.
Without increasing the repo rate, a new borrower looking to take out a home loan in the near future can still obtain loans at the prevailing low interest rates for some time.
As mentioned earlier, due to the prolonged holiday season, many banks and home finance companies have cut their mortgage rates for a limited period of time.
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Existing borrowers need to review and act: No change in the repo rate means that existing home borrowers will continue to pay their EMIs at the same interest rate. However, if your loan is more than 5 years old, it makes sense for you to check the interest rate system (i.e. BPLR, Base Rate, MCLR or External Benchmark Rate (EBR)) under which your loan is currently running.
Unless you have upgraded your loan to an external benchmark linked loan, it is very likely that you will be paying a much higher interest rate than the lenders charge for the new external benchmark linked home loan. In case you pay a higher interest rate, you can ask your existing lender to convert your loan into an EWC loan, which you may have to pay a small exchange fee for.
However, if your lender does not offer this option or requires a higher interest rate even on an EWC-linked home loan, you can consider switching your loan to a new lender. Since this is a floating rate loan, there are no switching fees. That said, all you have to do is check the new lender’s processing fee and fees and compare them to the interest rate advantage you would get by switching. If the net benefit seems attractive, you can move. Experts suggest that borrowers should consider a balance transfer if the interest rate cut is 0.5% or more.
Also Read: Repo Rate Linked Home Loans: Here are the home loan interest rates that are pegged to the repo rate
The maximum term of a car loan is between 5 and 7 years. Depending on whether you are taking out a new loan or are already a borrower, you can use this break in the repo rate to your advantage.
New borrowers: Most auto loans are still financed on a fixed rate basis, which means the interest rate you receive at the time of borrowing remains fixed for the life of the loan. Therefore, it becomes critical when you take out the loan.
So if you step in at a low interest rate (as you do now), you can take advantage of lower EMI payments throughout the life of the loan, even if the bank increases its overall interest rate. For example, you can currently get a car loan from SBI at the lowest interest rate of 7.20% per year or from HDFC Bank at the lowest interest rate of 7.05% per year.
So if you don’t have to decide which car to buy just yet, with the RBI interest break, you now have a little more time to make your purchase decision, as the banks are unlikely to be raising interest rates anytime soon.
Existing borrowers: If you took out your loan when the interest rates were higher, say 2 years ago, and the current interest rate is much lower, you can consider switching your loan to another lender. Before doing so, however, double-check your loan agreement for the foreclosure fee that is typically charged on a fixed rate loan. If the foreclosure fee is low and the benefit of getting a lower interest rate from another lender is higher, then you need to calculate the net benefit of moving to a new lender.
New borrowers should take advantage of an additional window of opportunity: even with personal loans, banks are unlikely to raise interest rates anytime soon. So if you are planning on getting a personal loan, it is a good idea to have your credit history with you so that you can check the best interest rate based on your credit history. The higher your credit rating, the better your chances of getting a loan at a good interest rate.
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Existing borrowers should look for cost savings: If you are an existing personal loan borrower, there is not much you can do as a personal loan is usually in the form of a fixed-rate fixed-term loan. However, if you are paying a much higher rate, say over 16%, then it would make sense to check other lenders’ rates to see if they offer lower rate loans, and then make the switch. Personal loans are usually for shorter terms, often 3-5 years, so switching in the first half of the repayment period can result in good savings. This is because for the first half of your repayment period, the main part of your EMI is the interest amount, so any switch will have a bigger impact in the form of a reduction in the interest amount.
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