If the central bank decides to slash the repo rate, banks will transfer the benefit to the customers who have opted for floating-rate loans.
The Reserve Bank of India (RBI) has today announced the repo rate cut by 25 bps to 6 per cent. Cutting the repo rate is generally seen as a signal that borrowing costs will go down, resulting in Equated Monthly Instalments (EMIs) to drop. However, there are several instances when customers don’t see the immediate benefit. The reason behind this is that the process by which a reduction in repo rates leads to lower interest rates for customers is neither immediate nor uniform.
Also, only floating-rate loans are linked to the repo rate, but even they may not have the immediate impact of repo rate change because such loans are reset at specific intervals, typically every three or six months.
What Are Fixed-Rate & Floating-Rate Loans
There are two types of loans: fixed-rate loans and floating-rate loans. In the first one, the rate will remain the same till the end. On the other hand, interest rates of floating-rate loans change depending on the decision taken by the Reserve Bank of India. So, if the central bank decides to slash the repo rate, banks will transfer the benefit to the customers who have opted for floating-rate loans.
What To Do If Your Interest Rate Of Floating-Rate Home Loan Remains Unchanged Even After RBI Slashing Repo Rate?
Ashwani Rana, founder of Voice of Banking, says that if a customer has a floating-rate home loan, and his interest rate remains unchanged despite the RBI reducing the repo rate, the customer should approach the bank to discuss the matter.
“If the bank refuses to help, customers are free to approach the RBI,” he said.
Which Is Better – Fixed or Floating?
According to experts, this depends on the current rate offered by the banks. For example, in the current scenario, the rate of interest is less and therefore, customers should go for a fixed rate of interest.
“This is the second repo rate cut of 25 bps by the RBI. We can expect one such cut but not beyond that. Because it will then have an impact on the fixed deposits as they are their liquidity. So if someone is going to take a home loan today, one should go for a fixed-rate loan,” Rana said.
Loan Takeover
According to Rana, customers also have the option of a loan takeover. However, there are certain things that customers should keep in mind while going for this. For example, interest rate differences, tenure remaining, processing fees and other details.
