EMIs on Home and Auto Loans

BE/RBINOTE/29/2020

Equated monthly installments (EMIs) on home and auto loans linked to repo rate set to fall further as the RBI’s Monetary Policy Committee (MPC) has decided to reduce the repo rate, the rate at which RBI provides short term loans to banks, by another 40 basis points to 4% from 4.40% earlier.

Following are worth mentioning here:

• Most of the banks have linked their external bench rate (EBR) to repo.
• This means, the reduction in repo will reduce banks’ EBR, hence the applicable interest on floating-rate loans.
• Borrowers having repo-linked loans can expect their EMIs to fall from July 1 as these loans are reset once in every quarter.
• However, those who have MCLR-linked home and auto loans, they may not get immediate relief.
• Typically banks reduce their MCLR rate after every change in repo with a lag. Even if some banks announce a reduction in MCLR, loan EMIs may not fall immediately as MCLR-linked rates are reset once or twice in a year.
• At present, SBI’s EBR is 7.05%. After today’s repo reduction, SBI’s EBR will fall to 6.65%. So the effective rate on home loans up to Rs 30 lakh for salaried individuals will reduce to 7% from 7.40% earlier.
• If you have a Rs 30 lakh home loan for 30 years from SBI then your loan EMI is likely to reduce by Rs 812 according to a back of the envelope calculation.
• The RBI has also decided to extend the moratorium granted on all term loans by another three months till August 31.
• Now borrowers have an option to extend the repayment of their loan by another three months.
• Both these measures- repo rate cut and moratorium extension – are expected to significantly reduce the financial strain on borrowers, facing pay cut and job loss.  

Expert’s Opinion

Adhil Shetty: CEO and Co-Founder: BankBazaar.com

• RBI Governor Shaktikanta Das’ latest announcement to cut the repo rate by 40 basis points to 4% and the extension of the moratorium option on all term loans by three months will provide some additional relief to countless borrowers who are currently struggling to manage their finances due to the economic fallout brought on to them by the on-going Covid-19 crisis.
• Worth mentioning here is that the extension of loan EMIs is by no means a waiver on repayments as interest will continue to get accrued on the principal outstanding. So, simply put, you’ll be well-advised to take the moratorium option only if you’re finding it extremely difficult to repay your loans during these six months. Opting for the moratorium could extend your loan tenure by tens of EMIs, considerably adding to your loan burden, especially if you’ve just started repaying your loan.
• The point being, calculate the accumulated interest before you take the moratorium, and see whether you can pay it back, in addition to your EMIs, quickly. If not, you can look for other, albeit slightly difficult, ways to raise cash like breaking your emergency fund or taking a loan from family members, so that you can repay your EMIs without moratorium support.