The RBI announced its decision to maintain the status quo on rates on December 8, 2021, after its bi-monthly monetary policy review meeting. The repo rate and the reverse repo rate amount respectively to 4% and 3.35%. This is the 9th consecutive monetary policy review meeting where the RBI has kept its key rates unchanged. The current pension rate of 4% is the lowest rate since April 2001.
Here’s a look at how existing borrowers and those looking to take out 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?
New borrowers: Since October 1, 2019, RBI has mandated banks to link home loan interest rates to an external benchmark. Most banks have used the repo rate as a benchmark for their home loans. The interest rates of these mortgages will move in parallel with the external benchmark to which they are linked, such as the repo rate.
With the repo rate at the lowest level seen in the past two decades and the RBI continuing to maintain the status quo, mortgage interest rates are expected to continue at lower levels and rising rates shouldn’t happen anytime soon.
Existing borrowers: Existing borrowers will continue to pay their EMIs at the same interest rate. However, they should check under which regime their home loan is currently outstanding. Borrowers who took out loans before October 2019 will have their loans tied to a different interest rate regime i.e. BPLR, base rate or MCLR.
If your home loan falls under one of these regimes, you are likely to pay a higher interest rate than is currently offered on a home loan linked to an external reference. In such a scenario, you can ask your bank to convert your loan to an external loan linked to a benchmark by paying an administrative fee. You may also consider switching to a new lender if your current lender does not allow you to switch to an external referral linked loan.
Experts suggest that borrowers should consider transferring the loan balance when the interest rate reduction achieved is 0.5% or more.
Anuj Puri, Chairman of ANAROCK Group, said, “With Omicron casting a shadow of doubt across the globe and in India, the RBI has decided to keep repo rates unchanged at 4% and the reverse repo rate at 3, 35% This was expected, and This is the ninth time in a row that the RBI has maintained the status quo amid current uncertainties Unchanged repo rates will help maintain the status quo on the low interest rate regime in for a while to come. This is working well for all home loan borrowers as the affordability environment will continue.”
Also Read:Repo Rate Home Loan: Here Are The Interest Rates Offered For Repo Rate Home Loans
Banks generally offer auto loans for a maximum term of between 5 and 7 years. However, keep in mind that interest rates on auto loans are usually tied to the MCLR. This means that at the time of disbursement of the car loan, the benchmark to which the interest rate is tied is the MCLR. Without a change in key rates, it is likely that there will be no change in the interest rates offered on auto loans.
New car loan borrowers: Usually, the interest rate on car loans is fixed for the duration of the contract. This means that once the interest rate is locked at the time of disbursement, it will remain the same throughout the period. So, with the lowest repo rate in a decade, if you take out a car loan now, you’ll enjoy the benefits of lower EMI payments over the life of the loan. Currently, SBI offers car loan rates from 7.20% and ICICI Bank car loan interest rates start from 7.50%.
Keep in mind that the interest rate on the car loan contracted for the purchase of a used car is higher than the interest rate applied on the purchase of a new car.
Existing car loan borrowers: If you took out a car loan before the pandemic, say in 2019, you may find that current interest rates are much lower than before. To take advantage of lower interest rates, you may consider switching lenders. However, auto loans usually come with prepayment or foreclosure charges. Check your loan agreement for applicable foreclosure charges. You need to calculate the net benefit of switching to a new lender.
New borrowers: With the RBI maintaining the status quo, banks are unlikely to raise interest rates on personal loans. So if you’re considering taking out a personal loan anytime soon, keep your credit score handy. Banks offer lower interest rates to borrowers with excellent credit history. 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 That Much on Loan Interest Payments
Read also: How to maintain an optimal credit score
Existing borrowers: Similar to auto loans, the interest rate on personal loans is fixed throughout the term. In addition, the term of personal loans is even shorter than that of car loans, usually 3 to 5 years. If the interest rate on your current personal loan is high, you may consider switching lenders after weighing the benefits against the costs you may incur. However, do this during the initial period of the loan, as the interest component is higher in the early years and decreases over the term of the loan.
Also Read: Personal Loan Interest Rates 2021: Comparison of Best Personal Loan Rates from Banks