The recent Repo Rate cut of 0.25 basis points has given borrowers a moment of cheer, but various factors determine how the rate cut will filter down and lower interest rates and monthly instalments. Expecting your current loan to cost less or thinking of taking fresh credit, let us explore the implications of the Repo Rate cut.

What does the rate cut mean for home loans and Mortgages, depending on the terms of your loan?

If Your Home Loan is Running at a Floating or Fixed Interest Rate

The customer can repay with a fixed or Floating Interest Rate when appending a Home Loan. Fluctuations in the Repo Rate (the RBI’s repurchase rate) will directly affect customers repaying their home loans at a Floating Interest Rate. Home buyers running a loan with a floating rate can expect a change in their interest rate according to the revision cycle of two to three months.

With a fixed interest rate applicable for a home loan, the interest rate does not change if the Repo Rate increases or decreases. The EMI remains constant for the duration of the fixed term. Banks usually offer a fixed interest rate for 2 to 3 years, after which the existing Floating Interest Rate is applied.

Thus, customers with a Floating Interest Rate can take advantage of the rate cut when the date for the revision as per the cycle is due, whereas applicants with a fixed interest rate will have to wait for the fixed term to end.

Is your Home Loan operating under the RLLR (repo rate linked), EBLR (External benchmark linked rate) or MCLR (marginal cost of funds) regime?

In 2019, the RBI initiated the Repo rate-linked mortgage system and advised banks to issue loans under the RLLR or repo rate-linked regime to pass on the benefits of a rate directly to customers.

Banks’ lending under the Repo rate-linked scheme will add a spread to the base rate for example, with a Repo Rate of 6.5%, a Bank adding 2.5% as operating costs and profit will issue a home loan at 9%. With the .25% reduction in the Repo Rate, customers with a Floating Interest Rate will be offered a reduced rate. Loan holders can opt for a reduced EMI or tenure to avail of the benefit.

The EBLR Rate issued by Banks is linked to the Repo Rate as the external benchmark a variation in the Repo Rate is carried forward to the EBLR Rate, though the Bank operating costs are included in the spread when issuing an EBLR Rate.

The interest rate issued by Banks under the MCLR scheme can vary from Lender to Lender. The key factors for calculating the MCLR Rate are the Repo Rate, the cost funds, the deposit rates, operating costs and profit margin. Thus, the Repo Rate reduction may not immediately reflect in the interest rate.

Banks offering an MCLR-linked interest rate will review the terms provided to a customer after 6 months; if the other inputs for calculating the MCLR Rate are favourable, a better rate may be offered.

The RBI has reduced the Repo Rate to make loans cheaper and infuse cash into the economy. Loan holders look for immediate relief. How long it takes to lower your EMI depends on the individual terms of the loan and the time stipulated to reset the terms. Banks will examine their fixed deposit rates, current CRR, and profitability. Banks tend to drag their feet when they need to lower interest rates, and the customer profile and payment track are also considered when reviewing the loan terms.

This is a time for upheaval in the mortgage lending scene as customers anxiously look to negotiate better terms for their existing loans and new home buyers wait to compare rates offered by Government Banks and Private lenders. The Home Loan top-up option helps customers renegotiate their loans and apply for surplus funds at a lower rate.

Home loan and Mortgage customers with timely repayment tracks can take advantage of Balance Transfers by transferring the principal balance of their loan to an alternate lender offering lower rates. At the same time, Banks go the extra mile to retain priority customers.

Will the Repo Rate Reduction Lower Personal Loan Interest Rates?

Personal Loans are unsecured funds with short repayment terms, up to a maximum of 72 months. Banks and NBFCs look to fund customers with suitable profiles who make timely repayments, thus ensuring rotation and profitability. The Personal Loan Interest Rates are based on the cost of funds, which includes the RBI repo or repurchase rate, the CRR ratio, deposit rates, and the financiers’ operating expenses. As Personal Loans are issued without securities, Banks must keep the default ratio below the acceptable limits.

Over the past two years, the RBI has increased the Repo Rate twice, but interest rates for an ICICI Bank Personal Loan, HDFC Bank Personal Loan and AXIS Bank Personal Loan remained steady with banks taking the changes in their stride. So, will the .25% reduction of the repo rate encourage Banks to reallocate interest for personal loans as Banks are not obligated to link personal loan interest to the repo rate fluctuations and take time to absorb the changes and consider their portfolio?  Further, the interest rate and EMI for a personal loan are fixed at the time of disbursal, and the EMI remains the same; therefore, a variation in the Repo rate will not change the existing rate of your loan.

At a monthly reducing balance, Personal Loan Interest Rates range from 10.80% to 20 %. Banks formulate an individual policy targeting customers according to their preferred segments and applicants with a mutually beneficial relationship. Other primary factors influencing the interest rate include:

• The net monthly income.
• The CIBIL Score.
• The category of the employer as per the Company Category List of the Bank.
• The Loan amount was approved.

Banks face liquidity issues due to the high fixed deposit rates and the downward trend in the savings ratio. If liquidity increases, banks might consider lowering the rate of New Personal Loans to performing segments. How the rate cut is transmitted to the personal loan sector depends on the bank’s policy, the cost of funds, and profit margins.

At this juncture, Personal Loan seekers can look for lower-rate options, and existing personal loan customers can take advantage of a reduced rate by Transferring their loan balance to an external Bank or Applying for a Personal Loan Top-up.

The RBI has reduced the Repo Rate to inject more cash into the economy and make loans more affordable. However, for the benefits to ultimately reach the average borrower, the expectation of relief through a reduced EMI for current obligations and the encouragement of fresh borrowing will depend on how effectively the rate cut is passed down in the coming months.

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