Sitting on cash? Use it to prepay your home loan after RBI repo rate cut; here’s how you will benefit
The 50 basis point repo rate cut by the RBI has raised hopes that home loan rates will also come down. In the past three months, the RBI has trimmed its key repo rate by 100 basis points, from 6.50 % to 5.50 %.But home loan rates have not fallen so much. Floating-rate home loans linked to the repo rate (via External Benchmark Lending Rate or EBLR), have declined by about 50 basis points while MCLR linked loans are down by only 25-30 basis points.Lenders are expected to reduce home loan rates in the coming weeks. Even if rates are cut, borrowers with surplus cash will do well to use that money to prepay long term loans. High-cost and long-term loans should be retired as early as possible. The longer the tenure, the higher is the interest outgo. Just like long-term investments build wealth for you, long-term debt burdens you with high interest. Floating home loans rates are now hovering around 7.85%. Salaried people get their annual bonuses around this time of the year. Many others may be sitting on cash withdrawn from stock markets. Prepaying a home loan is a smart way to use that money.Also Read | ITR Filing FY 2024-25: Have you got an Income Tax notice? Don’t ignore it! Top types of tax notices & actions requiredThis is particularly true for taxpayers who intend to opt for the new tax regime this year. Under the new regime, there is no tax deduction for the interest on home loans for self occupied houses. With no tax benefit available, the home loan should be prepaid as soon as possible. When you make a prepayment, the lender reduces the term of the loan. Prepayments can have a dramatic effect on the loan tenure, especially if the loan was taken recently. A prepayment of Rs 2 lakh amounting to five EMIs will reduce the tenure of a 15-year loan by two years. Old loans, with only a few years remaining will also be affected but at a lesser degree.Also Read | Rs 4.58 crore siphoned off from customer accounts, FDs! How former ICICI Bank relationship manager pulled off a stunning fraud – explained in 10 pointsBorrowers should keep in mind that a rupee saved is a rupee earned. A borrower will save 7-8% interest by prepaying a home loan. It is very difficult to earn that kind of post-tax returns from fixed income instruments today.
How prepayment reduces your loan tenure
If you took a loan of Rs 50 lakh for 20 years at 8.5% and the rate gets reduced to 8%, here’s how a Rs 2 lakh prepayment will impact the tenure.
*Calculation assumes that home loan rates will be cut from 8.5% to 8%
