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RBI cuts lending rate; home loans to become cheaper
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EMIs to fall by as Repo rates decreased by 50 basis points

After a gap of three years, and hiking the policy rates for 13 consecutive times between March 2010 and October 2011, the Reserve Bank of India (RBI) on Tuesday announced a cut in repo rate from 8.5 per cent to 8.0.

Also working groups will be set up to assess the possibility of having long-term fixed interest products which will not be exposed to interest rate changes.

This cut is an indication that banks could reduce the interest rates on home and car loans.

The RBI Governor, D Subbarao also announced that the pre-payment penalty on home will be abolished. It means the permit banks will not levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.

The latest rate cut move has come in line with market expectation. This is good news for the consumers. On the growth front, RBI expects FY’13 to be moderately better than the fiscal gone by. Apart from hurting investment activity, the rate hikes severely hurt the retail borrowers in the past; as higher loan repayments put household budgets for a toss. Inflation was the key driver that guided the Reserve Bank to tighten money supply.

 

How will the repo rate affect home loans?

Repo rate is the rate at which the banks can get loans from the country’s central bank. If the rate at which banks get loans from the central bank goes down it would automatically affect the rate at which home loans are being granted.

Real estate is an interest rate sensitive sector. Increases in repo rates impact the growth of real estate by reducing the demand in the market

If the repo rate is 6% then the banks may keep a margin of 4% and grant home loans at 10%. If the central bank opts to reduce the repo rate by 2% then the banks would have to pass on this benefit to the end customer. Hence the home loans would be available to the public at 8%.

RBI will undertake the mid-quarterly review of the monetary policy on June 18 while first quarter review is scheduled on July 31.

Sumit Sighania

Author: Sumit Sighania

Sumit Sighania is currently serving the position of a Sr Executive – Content Developer at a3solutions.in. His responsibilities include writing and editing real estate content for the website. His main interests are photography, travelling and food.