If you are repaying a home loan or thinking of taking a new loan, then this is good news for you. The Reserve Bank of India (RBI) has taken a big decision in the June monetary policy meeting and reduced the repo rate by 0.50% to 5.50% . This change will reduce the cost of lending to banks, and customers will get direct benefit from this.

What will be the impact on EMI?

After this decision of RBI, if banks also reduce the interest rate by 0.50%, then there can be a significant relief in the EMI of home loan. Let us understand this with an example:

• Loan amount: ₹30 lakh
• Loan tenure: 20 years
• Old interest rate: 8.75%
• New possible interest rate: 8.25%

How much will be the monthly benefit?

interest rate EMI (₹) Total Interest (₹) Total Payment (₹)

8.75% ₹26,511 ₹33,62,717 ₹63,62,717

8.25% ₹25,562 ₹31,34,873 ₹61,34,873

 Monthly EMI savings: ₹949

 Total savings in 20 years: ₹2,27,844

Reduce EMI or settle loan early?

Banks usually offer two options after the interest rate reduction:

1. Reduce EMI: There will be less burden on your pocket every month
2. Reduce loan tenure: EMI will remain the same, but the loan will get over sooner

For example, if you maintain the EMI at ₹26,511, your loan tenure will reduce from 240 months to 230 months . That means you can become debt-free 10 months sooner.

How does repo rate affect banks?

The repo rate is the rate at which the RBI lends funds to banks. When this rate decreases, the funding cost of banks also decreases. This makes it easier for them to offer cheaper loans to customers. As per the rules in force from October 2019, banks have to link their floating rate loans to an external benchmark (such as the repo rate). Therefore, changes in the repo rate directly impact home loan rates.

PC: Punjab kesari