The Reserve Bank of India cut the repo rate by 25 basis points to 6.25% in October 2016. This rate cut impacts home loans and lending rates in several ways. Lower repo rates mean banks pay less interest on borrowings, allowing them to charge lower interest on loans. However, rate cuts do not immediately lower borrower rates - banks must first lower their base lending rates. Existing loans may see loan tenures shortened instead of EMIs. Borrowers must contact their lender to reset terms if wanting lower EMIs. Rate cuts have the biggest impact early in loans when interest payments are higher.
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Rbi Cuts Repo Rate
1. Registered Office & Corporate Office
Aspire Home Finance Corporation Ltd., Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST
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Phone 091- 22-30102527 | Email: info@ahfcl.com
What is Repo Rate?
When banks need money they approach RBI. The rate at which banks borrow money from the RBI by
selling their surplus government securities to the central bank (RBI) is known as βRepo Rate.β Repo rate
is short form of Repurchase Rate.
The Reserve Bank of India (RBI) on Tuesday, 4th
October 2016 cut repo rate by 25 bps to 6.25 per cent. In
the case of low repo rate, banks have to pay lower interest amount on their borrowings. This in turn
enable them charge lower interest rates on the loans taken by us. Lower repo rate can also strengthen
positive momentum in the economy.
Impact of RBI Rate cuts on Home Loans & lending rates
ο· The RBIβs rate cuts, does not necessarily mean that the borrowers get benefited immediately.
Your banker has to reduce its Base Lending rate. If your bank reduces the base rate then only
you can see your Loan EMIs falling
ο· These rate cuts will not have any impact on fixed rate home loans or fixed rate consumer loans.
The rate of interest is fixed with respect to fixed loans.
ο· The existing bank customers, who have taken loan can see either their Loan tenures or EMIs
coming down. By default the banks reduce the loan tenure instead of loan EMI. That means your
monthly EMI installment amount remains the same. The rate cut will make a substantial
difference if the remaining loan term/tenure is very long.
ο· If you want to get EMI reduced, you may have to contact your banker or lender to reset the
term and conditions. Also, donβt forget to submit new ECS mandate for new EMI amount.
ο· Your Home loan EMI has two components, the interest and principal. The interest component is
bigger in the initial years, so a small change in the interest rate can have a huge impact. As the
loan period progresses, the principal component will increase. So, when the principal becomes
bigger, switching to a lower rate has minimal impact.
ο· You need to consider the loan outstanding, remaining loan tenure, interest differential and
other charges before opting for a Home Loan Switch.