A small cut in the repo rate by the Reserve Bank of India (RBI) can make a significant difference of thousands of rupees to your home loan EMI. When the RBI reduces the repo rate, it becomes cheaper for banks to raise funds, and this directly benefits them by making loans cheaper for their customers. It’s crucial to understand how much of a financial burden your EMI actually reduces, especially if your loan is linked to the RBLR (Repo Based Lending Rate) or EBLR (External Benchmark Linked Rate).
Repo Rate and Your EMI
The repo rate is the interest rate at which the RBI lends to commercial banks. Since floating-rate loans like home loans and car loans are now directly linked to this repo rate, the interest rate on your loan also immediately decreases as soon as the repo rate is cut. Whether this reduction is 25 basis points (0.25%) or 50 basis points (0.50%), it has a direct impact on your monthly EMI. This change is much faster than the old MCLR system, providing immediate financial relief to customers.
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On a ₹30 lakh loan
Let’s use an example to understand how much a 0.25 percent reduction in interest rate can save you. Suppose you have taken a home loan of ₹30 lakh for a 20-year term. If your interest rate was previously 8.35%, your monthly EMI would be approximately ₹25,820. Now, after a 25 basis point reduction, your interest rate becomes 8.10%. At this new rate, your monthly EMI will be approximately ₹25,367.
This simple calculation shows that you will save approximately ₹453 every month. These savings may seem small, but over the entire 20-year loan term, these savings add up to approximately ₹1,08,720. This means that a mere 0.25% reduction in interest rates can save you lakhs of rupees.
Benefits of Savings
When interest rates fall, borrowers have two excellent options. The first is to pay the reduced EMI and reduce pressure on their monthly budget. The second, more beneficial option, is to keep their EMI the same. By doing this, the difference goes directly towards repaying your principal, allowing your loan to be repaid faster in a shorter period of time. For example, a 0.25% reduction in interest rates can reduce the term of your 20-year loan by 10 to 15 months.
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