Interest rates for home loans depend on the market trends influenced substantially by the Reserve Bank of India’s repo rate. Hence, repo rate cuts often translate into reduction of the overall lending rate in the market. Consequently, home loan interest rate is also likely to go down under such circumstances.
At the start of 2019, the repo rate was 6.50%. As of June 2020, the rate has come down to just 4%. Such a drastic fall in the repo rate has also resulted in all-time low interest rates for housing loans.
Repo Rate: What Is It?
Repo or repurchase rate is the rate of interest against which different financial institutions avail loans from the RBI. All financial institutions determine the lending rate based on the prevailing repo rate. Thus, with an increase in repo rate, home loan interest rate tends to rise, and vice versa.
Therefore, changes in the repo rate indirectly influence the financial burden on borrowers. The RBI uses repo rate alterations to change consumer behaviour towards availing loans. Lowering the rates encourage more individuals to avail such loans.
The effect of repo rate cuts on home loans
An individual servicing a home loan at present can benefit in one of two ways from such home loan interest rate falls.
- Reducing repayment tenor – If one is comfortable with their monthly instalment burden of a home loan, he/she can instead opt to shorten the repayment tenor. Doing so will keep the EMI constant but reduce liability by decreasing the repayment period.
- Decreasing EMI – Alternatively, one can choose to reduce loan EMIs while keeping the tenor constant. Therefore, if you opted for a 20-year payment period, this remains unchanged. Nevertheless, your monthly liability from such credit will decrease substantially.
If you are a new borrower, use a loan EMI calculator to assess how much home loan EMI you can afford.
Apart from the advantages of repo rate cuts, one can also benefit further with income tax exemptions on their home loan.
Home loan tax savings
A repo rate cut is just one way to save money on your home loan payments. Additionally, one can claim up to Rs.2 lakh as tax benefit on the interest payments made towards home loan EMIs per year. Such home loan interest tax benefits under Section 24(b) of the Income Tax Act can reduce your overall financial burden, while the loan repayment is underway.
One should also know the tax benefits on a joint home loan, before availing such housing credits. If you avail such a loan jointly, both you and the co-applicant can avail up to Rs.2 lakh each on the yearly interest payments.
Lowering home loan liability through balance transfer
One can also avail a balance transfer facility on his/her home loans. Balance transfer refers to shifting an existing home loan from one lending institution to another. Through such a transfer, borrowers can take advantage of a lower home loan interest rate offered by other HFCs. Moreover, these transfers do not harm the borrower’s credit score in any way.
The primary reason to undertake home loan balance transfer is to lower total interest payable on the said loan. Nonetheless, before transferring an existing credit, one should consider the processing fees and additional charges associated with it.
Additional ways to lower EMIs
Other than repo rate cuts and balance transfers, an individual can follow the tips mentioned below before availing home loans to ensure limited repayment burden.
- Increase loan tenor
If an individual opts for a longer repayment tenor, his/her monthly liabilities will decrease significantly. Thus, one can avoid financial strain from such a credit by increasing the repayment period. Fortunately, most HFCs offer highly flexible tenor for housing loans.
- Compare the various home loan offers
Several HFCs offer home loans in India. However, the interest rates and features of each loan tend to differ from the other. Thus, you must compare the various aspects of all available housing loans before availing one. Take advantage of home loan EMI calculators during such comparisons and choose a lender offering the most convenient terms.
- Opt for a significant down payment
Borrowers need to make a down payment when availing home loans. This payment usually constitutes 20% of the property’s value.
Choosing to make a larger down payment can minimise the loan requirement. With a reduced loan quantum, EMIs for the loan should also decrease significantly.
These are some essential steps to reduce the home loan liability apart from interest rate cuts. These tips can limit your financial strain when repaying such a long-term loan.
Also Read: Easy Ways to Reduce Your Loan EMI Burden