How to reduce home loan EMI even if banks don’t cut rates

Mr. Sharma was planning to buy a house, but he felt the home loan interest rate of around 9% felt a bit too high. He then heard about SBI’s recent repo-rate linked home loans. After a little bit of inquiry, he found the bank was offering the loan at a rate of 8.05%. He was happy with it and promptly applied for the loan.

Different types of home loan rates

There are mainly two types of home loan interest rates. They are:

  •  MCLR-based loans – The marginal cost of funds-based lending rate, or the MCLR-based loans, are common types of home loans that all banks and NBFCs offer. It is based on an internal reference rate that is fixed by all the lenders in cohesion.
  • Repo rate -based loans – The RBI lends money to the banks at a lower rate of interest. Some banks offer home loans out of this funding. The beneficial interest rate from the RBI is shared with the borrowers. In the process, the borrower gets the home loan at a lower than normal interest rate, which proves to be quite profitable for him.

As you can see, the different rates affect the overall home loan amount, along with the total interest paid.

Using a repo rate based home loan to reduce EMI

A borrower can get his EMI reduced if he uses the repo rate based home loans. However, there are some points to keep in mind when taking a repo based home loan:

  • You don’t get the loan at the RBI’s repo rate – The repo rate is the rate at which the RBI lends funds to the banks. Since you take the loan from the bank, you are not entitled to get the home loan at RBI’s repo rate. The bank will add its charges and arrive at the rate of the home loan interest.
  • The EMIs don’t change erratically – Many people feel that the EMIs of the repo rate based loans change erratically, without notice. This is untrue. Instead, there is a lot of clarity and transparency in the repo rate structure. When the RBI makes a change, it is well announced, and as a borrower, you will get enough advance notice regarding the upcoming changes.
  • EMI may change when repo rate changes – However when the RBI’s repo rate does change, you will notice a change in your home loan EMI. If the rate goes up, the EMI volume will also go up and vice-versa. Most banks will ask you to pay a higher volume of the EMI. Some banks may be more generous and offer a renewed EMI tenure, which may allow you to pay the same EMI as before but have the loan for a longer duration.

In conclusion

As you can see, there are some ways in which you can have your home loan interest rate reduced, even if the bank keeps its rate the same. Explore the options related to a repo rate – based home loan and locate the most suitable loan for yourself. 

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