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For home loan borrowers, 2022-23 have been years that they would like to forget as they saw their home loan EMIs going up sharply. In the last two years, home loan EMIs have typically seen a rise of more than 20%. However, 2024 has come with new hope and there is a likelihood of an interest rate reduction estimated to be in the range of 0.5% to 1.25%. While existing home loan borrowers are likely to benefit from these rate cuts there are many other steps that you can take to gain more from falling interest rates in 2024. Read on to find out how as a home loan borrower you can benefit most in 2024.

Why and when interest rates are likely to fall
Due to rising global inflation, RBI went for a series of repo rate hikes starting from May 2022 to February 2023 (total increase of 2.5%), due to which all lenders were compelled to raise their interest rates. However, since then inflation has cooled down substantially and the possibility of a significant rise appears remote. This is why most experts anticipate the RBI to start reducing the repo rate from the second quarter of 2024, or even possibly in June or July. This is based on several factors.

The fall in retail inflation will help RBI in starting the reduction in repo rates. “While inflation remains above the RBI’s target of 4%, it’s expected to gradually soften over the coming months,” says Pramod Kathuria, Founder and CEO of Easiloan. Moreover, high interest rates are also considered detrimental to economic growth in the country so the central bank would prefer to reduce the rates unless high inflation forces it to do otherwise. “Economic growth is likely to moderate in 2024, prompting the RBI to ease monetary policy to support growth,” says Kathuria.
Reduction in repo rate in 2024 is likely in the range of 0.5% to 1.25%

Experts are of the view that the first-rate cut may not occur soon as it is most likely to be done towards the middle of the year 2024. “Current Market conditions suggests, Repo rate on hold at 6.50% through the middle of 2024, while a point cut to 6.25% post mid-year in 2024,” says Rahul Mehrotra, Managing Director & Chief Executive Officer at Religare Housing Development Finance Corporation Limited.

Many experts believe that once the rate reductions begin, it may not remain limited to a single cut as more cuts are likely to follow. “The total possible reduction in the repo rate in 2024 is still being debated, with expert opinions ranging from 50 basis points to 125 basis points. The actual figure will depend on various economic factors and RBI assessments throughout the year,” says Kathuria.

How home loan EMIs will get impacted
Home loan borrowers will have to wait in the first half of the year because any reduction in home loan EMIs is likely to happen near mid of the year 2024. “Reduction in Home Loan EMIs is slightly unlikely to happen in the near future. Once RBI gives a cut in Repo rate then only there might be some relief to the buyers, as per current scenario expectations that falls only in the second half of FY’25,” says Mehrotra.

Home loan borrowers fall in different categories as per the timing of the loan and nature of the lender. If you are an old home loan borrower who has taken it from a bank then you may be under either of these interest rate regimes: BPLR, Base Rate, MCLR or EBLR. If you have taken it from an NBFC or HFC you will have a different regime. So, the speed and quantum of the rate cut will vary for different interest rate regimes.

“With a repo rate cut, home loan EMIs would gradually decrease, but the timing depends on the transmission mechanism used by your lender. Some lenders may adjust rates quickly, while others might take longer. Generally, expect adjustments within 3-6 months of a repo rate change,” says Kathuria.

As the conservative estimate of repo rate fall is around 50% for the year 2024, therefore, EBLR home loan borrowers may witness a similar reduction in their home loan interest rate, however other borrowers under MCLR, Base Rate and BPLR may witness a lower reduction. “Considering that the expected reduction in repo rate for the next FY is very limited hence reduction in home loan rates would also be very limited. Overall, by the end of next FY there might be a reduction of around 50bps from the current rates,” says Mehrotra.

The optimistic estimate is for a much bigger reduction in home loan interest rates, close to 1.5%. “The potential reduction in home loan interest rates in 2024 could be between 0.5% and 1.5%, again depending on your lender and loan type. Some lenders might only pass on a portion of the repo rate cut, while others might offer more competitive rates to attract new borrowers,” says Kathuria.

Historical trend in old interest rate regimes in State Bank of India

Good time to switch to EBLR regime to make the most of the interest rate fall
As the interest rate cycle moves from rising rate to falling rate, it would be better for a home loan borrower to have the loan in EBLR to gain quickly from the fall. “Borrowers who have home loans under the EBLR (external benchmark linked lending rate) regime will get the quickest benefit of a reduction in home loan interest rate. Within this, the loans linked to the repo rate will see a benefit flowing in directly: the fall in interest rate will be equal to the cut in repo rate,” says Kathuria.

There is also an element of high predictability with the EBLR regime as you would know exactly how much your home loan interest will change depending on the external benchmark it is linked to. “EBLR is a very transparent method of pricing home loans and serves the borrowers interest very well. It gives a complete view of the margin being charged by the various banks and hence in easy comparison across the various lenders. Also, since it is an external rate hence the benefit also would reach the borrowers sooner. Hence, a shift to EBLR could be a good option,” says Mehrotra.

So, if you have not changed the interest rate regime of your home loan then it is the best time for you to go for a switch especially when your home loan is still running under BPLR, Base Rate or BPLR. While competitive home loan interest rates under EBLR is currently available around 9%, the minimum interest rate under the base rate in State Bank of India is 10.25%. So base rate borrowers will be paying a much higher interest rate. Similarly, SBI’s home loan interest rate under MCLR is also likely to be higher as the bank charges a significant spread over the one-year MCLR which is currently at 8.65%.

“If you have a home loan from a bank, you should first check if the loan is running under the EBLR regime. If it is not, request your bank to change your home loan to EBLR. The bank will charge a nominal fee and allow the shift,” says Kathuria.

You may just need to pay a nominal fee to switch to the lower interest rate regime with the same lender. “SBI charges a one-time switchover fee of Rs 1,000 and applicable tax for this. If you have taken a home loan from an NBFC, this option is not for you,” says Kathuria.

When you should go for refinance option
If you have taken a loan from a bank that is under an older interest rate regime like BPLR, Base Rate or MCLR, the bank would allow you to easily switch to EBLR. However, despite switching to EBLR if your interest rate is higher than other banks then you may consider refinancing your home loan. However, you need to be sure that the next bank is willing to offer competitive rates in your specific case.

If you have taken a loan from a non-bank lender, who is charging a higher interest rate than other lenders, and is not allowing you to switch to a lower rate, then you may consider refinancing your home loan from another bank or a non-bank lender which is offering a competitive rates.

Whenever the interest rate on your home loan is reduced the lender will ask you whether you would like the EMI to come down or reduce the tenure. Going for same EMI, if you can afford, will be a better choice as it will help you repay your home loan faster.

  • Published On Jan 5, 2024 at 12:45 PM IST

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