This is a great time to take a home loan. Here's why

Last week, the Reserve Bank of India reduced its repo rate yet again. With the 25 basis points reduction, the repo rate is now at 6 percent.

Since mid-2014, this is the seventh time the RBI has reduced the lending rate in response to various macroeconomic factors. Not just that, banks now are proactively reducing lending and deposit rates.

Recently, we saw the State Bank of India slash its deposit rate by 50 BPS to 3.50, even before the RBI had announced a rate cut. In the recent past, the SBI had slashed its home loan rate to 8.35%, just above its one-year MCLR of 8.00.

For everyone repaying a Home Loan, or looking to take one, all this is great news. For the former, the rate cuts have translated into lower EMIs and higher long-term savings. For the latter, there's now the possibility of taking bigger loans or incurring lower interest costs in making their dream home purchase a reality. Let's take a look at how the rate cut impacts customers.

For existing loan holders- Transfer or Pre-Pay

With the RBI's latest repo rate cut, banks and NBFCs may soon announce their round of rate reductions. If you're repaying a Home Loan today, and if you're not paying a competitive interest rate, you have two options for switching to a cheaper loan.

The first option is to make the switch with your existing lender. If you're repaying a fixed rate loan, or a loan linked to the base rate regime, you may be paying a rate significantly higher than the rates on MCLR-linked loans.

All new floating interest bank loans issued since April 1, 2016, are linked to the MCLR, which is a more responsive and transparent interest rate regime where the intervals of automatic interest rate resets are pre-defined in the loan agreement.

Switching the loan with your own lender may involve processing or transfer fees. The second option is to switch to another lender. Again, the points of MCLR hold true. You can also switch from a bank to an NBFC, or vice versa.

For this outward transfer, you will incur processing and transfer fees. In both options, you must weigh your transfer costs. If these do not exceed interest savings and tax benefits, then you should make the transfer. If you're at the start of your loan, this may save you several lakh rupees in the long term.

But if you're nearing the end of your loan, you may want to maintain it for its tax benefits. Secondly, if you're happy with the interest rate you're paying, you should consider making principal pre-payments to reduce your loan balance.

When the interest rates are trending low, it is the best possible time to make pre-payments. Pre-paying at a lower interest rate, you can clear a part of your loan at a lower interest cost, and this helps you save heavily in the long run, as compared to pre-paying at a higher interest rate.

FOR NEW LOAN SEEKERS

The prospect of interest rates lowering would further boost the confidence of property buyers, who have also benefitted from the arrival of the Real Estate Regulation and Development Act. There's never been a better time to go for your dream home.

Loan seekers can now take on bigger loans to fund bigger property purchases. Before you start your loan hunt, you may want to get a free check on your Credit Score, which is becoming increasingly important for getting the best loan deals.

Lastly, before you finalise a loan, go online and compare all your options from various banks and NBFCs.

The Writer is CEO, Bank Bazaar.com