“Not even hardcore economists would follow the Reserve Bank (RBI) as keenly as me,” quipped my friend, a home loan borrower.

She is employed with a retail multi-national company, but would always say she worked for a bank.

That was because the bank (from which she got her loan) would take away a chunk of her salary towards EMIs each month!

“Did you know that in the past two years, the RBI has hiked repo rates 13 times?” she asked.

The pain of having serviced increasing EMIs for the last couple of years was obvious in her eyes. The story of every home loan borrower's life, I thought!

But with the larger-than-expected 50 basis point cut in the repo rate last week, my friend is hopeful that her EMI would come down. Will the benefits be made available only to new borrowers or will it be passed on to existing customers?

Here's a quick lowdown on what you can expect if you already are a borrower or plan on becoming one soon.

Existing borrowers

For starters, RBI's decision to cut rates is a definite positive if you are already servicing a floating rate loan. But just how much of a ‘positive' it is, remains to be seen.

For one, most loans are pegged to banks' base rate . So, your EMIs will come down only when banks reduce their base rate.

And that could take a while , as most banks will look at reducing their deposit rates first to bring down the cost of funds.

So, while you can expect your EMIs to get cheaper, you will have to wait. Even then, there's a possibility that banks would initially lower the rates only on certain loan products.

When and by how much you benefit will depend on which bank you borrowed from.

While the SBI Chairman has gone on record saying that his bank would do a comprehensive cut in lending rates, others such as Vijaya Bank and Indian Overseas Bank have said that they could take some time to follow suit.

IDBI Bank, on the other hand, became the first lender to actually announce a cut in its rates. The bank has announced a 25 basis points cut in its base rate to 10.50 per cent effective from April 20.

ICICI Bank, a day later, announced a 25 basis points reduction in its base rate (effective April 23). PNB and Bank of Maharashtra too have reduced their base rates by 25 bps and 10 bps respectively. Most banks will have to huddle over an asset-liability committee before they decide on their future moves. So, whichever bank you have borrowed from, look out for announcements in this regard for more clarity.

More power in your hands

But what happens if your EMIs do not come down?

Fret not, for, without having to pay any penalty to your bank, you can now borrow from another bank offering a lower interest rate.

RBI has disallowed banks from levying foreclosure charges or pre-payment penalties on home loans on a floating interest rate. You can also consider a loan conversion option with your bank.

However, do note that you will stand to gain from the repo rate cut only if your loan is floating. Fixed loans wouldn't see any drop in their EMIs by the virtue of their fixed nature.

New borrowers

If you have been stalling your asset purchases (home, car, etc) only because the interest rates were too high, the stars are aligning in your favour! New borrowers will definitely stand to benefit from this move. A fortnight before the repo rate cut, IDBI Bank and Canara Bank had slashed floating home loan rates by 25-175 basis points for new sanction across slabs.

Look out for more such competitive loan products in the months to come. Needless to say, it will make a lot more sense to opt for a floating rate loan now.

Srividhya.sivakumar@thehindu.co.in

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