Home loan interest rates have seen a sharp decrease in 2020 with the rate cuts announced by the Reserve Bank of India (RBI). From February 2o19, the central bank had cut the Repo rates on seven different occasions, thus bringing it down by 250 cumulative points. The rate cuts were announced to guard against liquidity crunch and provide financial stability to the economy, especially in the face of rising inflationary trends and the coronavirus pandemic.

Understanding repo rates: Repo rate is the rate at which the banks borrow from the RBI. So every cut in the Repo rate can allow banks to pass the benefits to customers, in the form of reduced loan interest rates. To ensure that the benefit was passed to customers, the RBI directed all scheduled commercial banks along with others to link interest rates on retail and MSME loans to an external benchmark. The financial institutions were directed to adhere to this policy from October 1, 2019. Subsequently, most of the financial institutions selected Repo rates as their external benchmark.

Existing repo rates and its linkage with home loans : At present the Repo rate stands at 4%, thus allowing for a home loan friendly tax regime. In response to the cumulative rate cuts, financial institutions also transmitted a large portion of the cuts in their housing loan portfolio, thus providing for decreased home loan rates in 2020. In October 2020 the RBI, during its monetary policy review, left the repo rate unchanged.

Understanding MCLR and RLLR-based home loans : Before October 2019, banks could provide housing loans based on Marginal Cost of Lending Rates (MCLRs), which was an internal benchmark. Post-October 2019, banks now have linked their new home loans to the Repo rate. This is known as Repo Rate Lending Rates (RRLR). RRLR comprises both the Repo rate and the margin charged by the bank. If you have previously availed MCLR-based home loan, you have the option of changing it to RRLR-based interest rates.

Additional liquidity measures by the RBI and its impact on housing loans : Amidst the coronavirus pandemic, the RBI, in August 2020, announced an Additional Specialty Liquidity Fund (ASLF) of Rs 5,000 crore for the National Housing Board (NHB).  This allowed the real estate sector with the much-required liquidity, besides ensuring that housing finance companies could provide home loans at lower interest rates.

What is the existing home loan interest rate?

At present, the home loan interest rates can be as low as 6.7% for new customers. But for the majority of home loan borrowers, the interest rate is over 7%. If you are looking to avail a home loan during the festive season, you can receive attractive home loan EMI options. This is because many housing finance companies/banks have lowered the interest rates along with waiving of charges such as processing fees. To have a clear understanding of your home loan EMIs, you can also use the online home loan calculator.

Can home loan interest rate decrease further in 2020?

The coronavirus pandemic and the subsequent lockdowns adversely impacted the real estate sector in the country. But with the country seeing unlocks in a phased manner, there is a revival in core sector industries along with the real estate sector. The RBI has maintained that it will take the requisite steps to ensure sufficient liquidity in the coming months. With signs of revival in the economy and the steps taken by the RBI, it is expected that the demand for housing will increase in the near future. The rate of inflation, RBIs decisions and demand for houses during the festive season will determine the future rate of interest for housing loans.

Will RBI’s decision to link home loans to Loan-to-Value (LTV)Ratio decrease home loan interest rate?

In October, 2020 the RBI rationalized the risk weight of home loans by linking it to the Loan-to- Value (LTV) ratio. This eased the rule of linking the risk weight of housing loans to the size of the loan.  This new policy regulation, applicable to all loans sanctioned up to March 31, 2022, specified that if the loan amount was 80%, then the risk weight of 35% would be applicable. In case of the loan amount being between 80% and 90%, it would carry a risk weight of 50%. As per the stipulations, banks can provide 90% LTV ratio, for housing loans less than Rs 30 lakh. For home loans between Rs 30 lakh and Rs 75 lakh, the LTV ratio can be up to 80%. Here, you must understand that the LTV ratio is the percentage of the property value being provided as a home loan. It is calculated by the formula: Borrowed amount/ property value*100. While this decision is aimed to improve liquidity, it is expected to further reduce the interest rates and pave the way for affordable home loan EMIs.

Conclusion: Thus, the year 2020 has seen a significant reduction in home loan interest rates. If you are looking to buy your dream house, then you can easily calculate your home loan EMIs using the online home loan calculator. Always remember to avail loan from a trusted and reliable financial partner.