For many years, many middle-class families couldn’t afford to purchase a house due to a high interest rate. But, as of 7th Feb, 2025, the Reserve Bank of India (RBI) had decided to reduce the interest rate. This decision was made along with the reduction of taxes as per the budget in 2025. Presently, middle-class families can actually afford to buy a house by taking a loan. So, scroll through to know about the repo rate reduction and how it will bring relief.
What decision did the RBI make recently?
On 7th Feb, 2025, the new governor, Sanjay Malhotra, spoke about a repo rate cut of 25 basis points. This implies that the rate will be equivalent to 6.25%. Such a rate has not been observed in the past 5 years. Such a decision also reflects the bank’s commitment to support economic growth.
How will homebuyers benefit from the rate reduction?
The recent reduction in the repo rate can offer many benefits. Let’s check these one after the other.
- As the repo rate is reduced to a certain extent, it can lead to a low interest rate. Homebuyers can then think about making less repayments to pay off the loan. This can further help save a considerable amount across the loan’s term.
- With lower interest rates, homebuyers can think about taking a loan with a high amount. This will be especially beneficial for those who are seeking a luxurious house. They will also be in a better position to buy a house in an affluent region.
- As homebuyers’ affordability increases, the demand in the real estate market will be stimulated. In the long run, real estate developers may come up with better deals. They may also present flexible payment plans before closing any deal.
- As existing homebuyers continue to pay off the loan, they will benefit from the low rate. This means that they can pay off the loan in less time. The financial burden will then be reduced as they have to meet several expenses.
- People may also think about making an investment through REITs due to the lower rate. Investors can then assure themselves of stable returns as the interest rate falls down. Apart from everything else, entrepreneurs can think about buying an office space due to low borrowing costs.
Eventually, the reduction in the interest rate can enhance economic growth. Apart from improving the sentiment, the rate cut will boost the confidence of many individuals. However, even when this seems to be true, the banks may not approve home loans quickly at the decided rate. Moreover, the rate cut may be ineffective. This is because the property prices will increase if inflation stays high. On the other hand, a 25 basis point cut in the repo rate indicates something different. With time, RBI’s monetary policy will work in sync with various strategies to boost spending.
As far as the implications in the sector are concerned, they will be profound. In 2024, the market momentum was lagging behind due to a significant increase in property prices. But, the market buoyancy will be sustained with the rate cut along with numerous tax benefits.
In due course of time, homebuyers may gain some more relief with a further rate cut. This decision is anticipated in the forthcoming MPC meeting. Hence, it will boost property sales tremendously and support sustainable growth. Moreover, homebuyers as well as developers will develop confidence owing to the further rate cut. Those who were hesitant to take home loans can also take the plunge. Beyond this, developers can obtain funds easily for project execution. They will also be thankful for the improved credit availability. While they meet deadlines, they can further think about constructing more residences at a steady pace.
What might be the cons of taking a loan after the decrease in the rate?
Taking a loan after a rate cut may seem ideal. But, there may be some downsides.
- Considering a loan means taking on more debt. So, it can be challenging to pay off the loan if the financial situation changes.
- Homebuyers may tend to borrow more due to low rates. But, this can bring in a new responsibility if the individual can’t repay the loan comfortably.
- The economic condition can change significantly in the future. Therefore, it can probably increase the cost of borrowing.
- By considering a loan, individuals might repay the loan with the money in the bank account. This can leave them unprepared in case an emergency arises unexpectedly. Way ahead, they will also not be able to meet financial goals if they have to repay a high amount.
Finally, the RBI may consider reducing the interest rate based on inflation. If the inflation is stable, then the bank will think about reducing the rate further. The global economic conditions will also influence the bank’s decision. Monetary policy decisions will also be taken based on the government’s fiscal policy. But, the inflow of investments will increase as foreign investors will be drawn to India’s growth-oriented approach.
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