Loan Interest Rates: RBI Maintains Rate Status Quo: What Should Mortgage, Auto, and Personal Loan Borrowers Do Now?
The RBI keeps its key rate unchanged for the 8th time in a row; maintains an accommodating position
The RBI’s Monetary Policy Committee (MPC) has decided to keep policy rates unchanged, Governor Shaktikanta Das said, announcing the results of the three-day bimonthly review on Friday. Das said the MPC voted to keep the repo rate at 4% and maintained an accommodative stance to support growth. The repo rate also remains unchanged at 3.35%.
With the RBI maintaining the status quo, banks are unlikely to raise interest rates on loans anytime soon. Also, with the festivities in mind, most lenders offer lower special rates and have plenty of other offers for borrowers – home loans come at interest rates as low as 6.5-6. , 7%. This gives borrowers one last window to qualify for one of the lowest rates on home, auto and personal loans before rates start to rise again.
At its bimonthly Monetary Policy Review meeting on October 8, 2021, the reverse repo rate and reverse rate remain at 4% and 3.35%, respectively. This is the ninth consecutive monetary policy review meeting after the last change in May 2020 when the central bank decided not to change the rate. The current repo rate of 4% is the lowest rate since April 2001.
Here’s a look at how existing borrowers and those looking to take on a new loan (whether it’s a home loan, car loan, or personal loan) can take advantage of the break from RBI.
What should mortgage borrowers do?
The interest rate is the most critical factor that determines how much you pay for your loan, i.e. your loan. Since home loans are the longest term loans for most borrowers, any change in interest rates has a huge impact on the overall interest payment over the remaining term of the loan.
More time for new borrowers: Most home loans are granted at variable rates. The RBI had made it mandatory since October 1, 2019 that all variable rate retail loans from banks be linked to an external benchmark such as the repo rate. Most banks have used the repo rate as a benchmark for their mortgage loans. With the repo rate at an all-time low over the past two decades, the continued low interest rate regime bodes well for borrowers.
In the absence of an increase in the repo rate, a new borrower who plans to take out a home loan in the near future can still get loans at low rates that are going to be in effect for some time to come.
Also, as mentioned above, due to the ongoing holiday season, many banks and housing finance companies have reduced their mortgage rates for a limited period.
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Existing borrowers should consider and take action: No change in the repo rate means that existing mortgage borrowers will continue to pay their IMEs at the same interest rate. However, if your loan is over 5 years old, it will be a good idea to check the interest rate regime (i.e.BPLR, Base Rate, MCLR, or External Reference Rate (EBR)) under which your loan is currently in progress.
If you have not transferred your loan to a loan linked to an external benchmark, it is very likely that you will pay a much higher interest rate than that charged by lenders on the new mortgage linked to an index. external reference. If you pay a higher rate, you can ask your existing lender to convert your loan to an EBR linked loan for which you may have to pay a nominal conversion fee.
However, if your lender does not offer this facility or charges a higher rate even on an EBR linked home loan, you may consider transferring your loan to a new lender. Being a variable rate loan, there is no penalty for switching. This means that the only factor you need to check is the processing fees and the new lender’s fees and compare them with the interest benefit you would get from the change. If the bottom line looks good to you, you can take action. Experts suggest that borrowers should consider balance transfer when the interest rate reduction is 0.5% or more.
Read also: Home loan linked to the repo rate: Here are the interest rates for home loans linked to the repo rate
The maximum term of an auto loan varies between 5 and 7 years. Depending on whether you are planning to take out a new loan or are an existing borrower, you can use this break in the repo rate to your advantage.
New borrowers: Most car loans are always funded on a fixed interest rate basis, meaning that the interest rate you get when you get the loan will stay fixed for the entire term of the loan. Therefore, when one takes the loan becomes critical.
So if you enter at a low interest rate (like currently), you can enjoy the benefit of lower EMI payments throughout the life of the loan, even when the bank raises its overall interest rate. For example, currently you can get a car loan from SBI at their lowest rate of 7.20% per annum or from HDFC Bank at their lowest rate of 7.05% per annum.
So if you haven’t decided which car to buy yet, with the RBI’s break on rates, you now have more time to make your buying decision, as the banks are unlikely to be raising rates anytime soon. .
Existing borrowers: If you took out your loan when the rates were higher, say 2 years ago, and find that the current rate is much lower, you may want to consider transferring your loan to another lender. But before you do that, check your loan agreement for foreclosure fees that are typically charged on a fixed rate loan. If the foreclosure fees are low and the benefit of getting a lower rate from another lender is greater, then you will need to calculate the net benefit of moving to a new lender.
New borrowers should use an extra window: in the case of personal loans, too, banks are unlikely to raise rates anytime soon. So, if you are considering taking out a personal loan, be sure to keep your credit score with you so that you can check out the best rate based on your credit score. The higher your credit score, the better your chances of getting a loan and that too at a good interest rate.
Also Read: A 50 Point Increase In Your Credit Score Can Save You So Much On Loan Interest Payment
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Existing borrowers should look for cost savings: If you are an existing personal loan borrower, there is little you can do because a personal loan is usually given in the form of a term loan with a rate of fixed interest. However, if you are paying a much higher rate, say above 16%, then it would make sense for you to check the rates of other lenders to see if they are offering loans at lower rates and then make the switch. Personal loans are generally for shorter terms, often 3 to 5 years. Therefore, a change can lead to good savings when you make it in the first half of the repayment period. This is because in the first half of your repayment term, the main component of your EMI is the amount of interest, so any change has a bigger impact in the form of a reduction in the amount of interest.
Read also: Personal loan interest rates 2021: Comparison of the main personal loan rates of banks