Following the recent rate cuts of 100 basis points since February of this year, borrowers with a Rs. 1 crore home loan over a 20-year tenure can expect to save Rs. 6,329 on their monthly EMI. Over the entire loan period, this translates to a total interest saving of approximately Rs. 15,18,861, offering significant financial relief to loan takers.
Repo rate cuts take some time to reflect for the borrowers, as loans tied to older benchmarks adjust more slowly depending on their reset rates, while repo-linked rates react quickly.
If someone takes a home loan of Rs. 1 crore at an interest rate of 9 percent per annum for a tenure of 20 years, they would pay a monthly EMI of Rs. 89,973. Over the course of the loan, the total interest paid would amount to Rs. 1,15,93,423, making the total repayment Rs. 2,15,93,423.
After the Repo rate cut of 100 basis points, the 9 percent interest per annum will change to 8 percent per annum. If someone has a floating interest rate loan of Rs. 1 Crore at an interest rate of 8 percent per annum with a 20-year loan tenure, they would pay a monthly EMI of Rs. 83,644. Over the course of the loan, the total interest paid would amount to Rs. 1,00,74,562, making the total repayment Rs. 2,00,74,562.
How the Repo rate & CRR affect loans
When the repo rate is low, banks can borrow money from the RBI at a cheaper rate. As the banks’ borrowing cost decreases, it leads to a reduction in the interest rate that they charge on loans to the customers, which eventually makes loans cheaper for both individuals and businesses. A lower repo rate usually leads to cheaper loans and higher borrowing, while a higher repo rate results in more expensive loans and reduced borrowing.
Since February this year, the Reserve Bank of India (RBI) has reduced the repo rate by a total of 100 basis points. This rate reduction has brought the repo rate down from 6.50 percent to 5.50 percent.
When the CRR is high, banks have to keep more money with the RBI, which reduces the money that banks have available to give as loans and when the CRR is lowered banks are required to hold less money with the RBI, which frees up more funds therefore, bank may offer loans more easily and at lower interest rates. The Central bank uses CRR to manage liquidity in the Banking system. The CRR will also be cut down by 100 basis points from 4 percent to 3 percent in 4 tranches of 25 basis points each. Earlier in December last year, there was a CRR cut of 50 bps.
Written By Abhishek Das
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