New Delhi, Feb 8 (IANS): The Reserve Bank of India (RBI) has announced a 25 basis points rate cut in the repo rate which is a big relief for those who have taken a loan (especially a home loan).

All retail floating rate loans issued after October 1, 2019, are linked to an external benchmark -- the repo rate. In such a case, whenever the repo rate is reduced by the central bank, banks have to compulsorily transfer this benefit to their customers.

To implement this, banks have to reset the interest rates every quarter.

If your home loan was taken before October 1, 2019, and it is linked to the Marginal Cost of Funds Based Lending Rate (MCLR), then refinancing the home loan would be a good option to take advantage of the reduced repo rate.

Whenever the repo rate is reduced, the interest rates on all types of loans linked to it decline, and people have to pay less interest on the loan than before.

When the repo rate is lowered by the RBI, most of the banks do not reduce your EMI but give you the benefit of a reduced interest rate by reducing the tenure of your loan.

For example, if a borrower has taken a home loan of Rs 75 lakh at an interest rate of 9 per cent for 20 years, but after 36 months of taking the loan, the interest rate will reduce to 8.75 per cent.

Due to the reduction in interest rate, the borrower will now have to pay interest of Rs 1.57 crore for 17 years instead of Rs 1.62 crore on the loan. This will result in a saving of Rs 4.97 lakh, and the loan will be over seven months earlier.

Notably, if the interest rate reduction occurs after 24 months, the borrower can save Rs 5.8 lakh (Rs 1.56 crore vs Rs 1.62 crore) in interest outgo and close the loan eight months earlier.