RBI repo rate cut: How much will your home and car loan EMIs reduce?

With the six-member monetary policy committee (MPC) voting to reduce the repo rate by 35 basis points (bps) to 5.40 per cent, those shopping around for home loans, car loans et al may land a cheaper deal soon. Of course, that's assuming banks decide to pass on the benefits of the RBI repo rate cut to the end consumers. This is the fourth consequent rate cut by the apex bank - bringing the repo rate down by 1.1 per cent in this calendar year - hence speculation is rife that cheaper loans are finally on the cards.

Repo rate is the interest rate at which the RBI lends money to banks. When the cost of borrowing goes down for banks, they can choose to lower their respective marginal cost of funds based lending rate (MCLR), which is the minimum interest rate that a bank will charge on the loan and directly impacts your EMIs.

For instance, consider a Rs 25 lakh home loan from SBI for a 10-year tenure. The current interest rate offered by the bank is in the 8.5-8.8 per cent range, depending on borrower profile. At the higher end of 8.8 per cent interest rate, the EMI outgo currently is about Rs 31,399. The country's largest bank announced on Wednesday that it will cut lending rates across all tenors by 15 bps effective August 10. It's one-year MCLR has now come down to 8.25 per cent from 8.4 per cent . This means that its home loans will soon start at 8.35 per cent, assuming the current structure of one-year MCLR+ 10 bps for female salaried borrowers, going up to 8.65 per cent for home loans up to Rs 30 lakh. At the higher end of the revised interest rates, the EMI will now come down to around Rs 31,197.

But had SBI opted to pass on the full benefit of the latest repo rate cut, the new interest rate would have come down to 8.45 per cent, and the EMI outgo would be far lower at around Rs 30,930. That may not seem like much but the total reduction in your interest payable would be over Rs 56,000 compared to current rates. Moreover, the bigger the loan amount, the higher the benefit for home loan takers.

A slew of banks have already reduced their MCLRs in recent times. HDFC Bank, the largest private sector lender, cut its lending rates by 0.10 per cent to 8.60 per cent across all tenors, on Tuesday. Bank of Baroda announced it will cut its MCLR across all five tenors by 15 bps to 8.45 per cent with effect from August 7. More banks may follow suit following the latest MPC meet.

"We hope that the current rate cut would translate into lower EMIs and help soften home loan rates and also boost sales. It will help to ease the pressure off the market by attracting buyers to invest in the real estate sector," said Surendra Hiranandani, chairman and managing director, House of Hiranandani, adding that realty is one of the few sectors boasting the potential to kickstart the sluggish economy. He pointed out that real estate being a highly cost-sensitive sector, demand will only pick up if the cut is substantial to result in significant cost savings. The forthcoming festive season is expected to further boost the sector.

Car loan seekers may also get luckier in the days ahead. SBI's auto loans that start at 9.15 per cent currently will come down to 8.8 per cent if the MCLR reflects the entire 35 bps repo rate cut announced today. In other words, the EMI on a Rs 10 lakh car loan for seven years will come down from around Rs 16,165 to Rs 15,988, helping you save close to Rs 15,000 on the total interest component.

However, it's important to note that bank interest rates have remained notoriously sticky despite the falling repo rate climate. Data of the last five years shows that the RBI reduced rates by 2.6 per cent (including the latest cut), but banks have so far passed on less than half of it to customers. "The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019)," the RBI said in its third bi-monthly Monetary Policy Statement released on Wednesday. In the same period, the repo rate was slashed by 75 bps. Moreover, the weighted average lending rate of banks on outstanding loans has reportedly gone up from 10.38 per cent to 10.41 per cent since the beginning of this year.

With the RBI deferring the decision to link all new floating rate personal or retail loans (housing, auto, etc.) to external benchmarks like the repo rate, things are unlikely to improve in a hurry. Also, existing home loan customers may have to wait awhile to see an impact on their EMIs because of the reset date factor. The interest rate of the loan for the borrower is changed only on the reset period, which is typically 1 year. So your loan rate will go down only after twelve months even if your bank reduces the MCLR rate today. However, if your loan has a reset clause of August or September, you are in for significant savings soon.

Also read: SBI cuts home loan rates by 15 bps across all tenors after RBI policy announcement