How Repo Rate Increases and Decreases Affect Home Loans? What to do to reduce home loan? There is no change in the repo rate at present which will be a relief to those who are planning to take a home loan.
Common people rely on home loans as a home is an expensive dream. Home loan repayment concessions are beneficial for borrowers. At the RBI monetary policy review meeting that ended yesterday, it was decided to keep the repo rate unchanged at 6.5 percent for the second consecutive meeting. . Repo rate is the rate of interest paid by RBI on loans of commercial banks. When there is high inflation in the economy, the Reserve Bank tends to increase the repo rate. This discourages commercial banks from borrowing money from RBI. This reduces the working capital and helps in controlling inflation.
Is there a relationship between repo rate and home loan? Changes in repo rate will apply to all loans with floating interest rate linked to repo external benchmarks, not just repo rate and housing loans. Home loans often fall into this category. Therefore, any change in the repo rate directly affects the interest rate on floating rate home loans.
How will home loan repayments be affected?
The main benchmark for interest rates in the banking sector is the repo rate. For borrowers with floating-rate home loans, any change in the repo rate will also bring changes in the home loan interest rate. This, in turn, will affect repayment terms.
When the RBI lowers the repo rate, it will cost commercial banks less to get loans from the central bank. As a result, banks may reduce lending rates, including home loan interest. This reduction in interest rates will help borrowers to reduce their monthly repayments. Conversely, when the RBI increases the repo rate, the cost of borrowing for banks will increase. Banks may increase lending rates to maintain profitability, including interest rates on floating rate home loans. This will result in higher repayment amount for borrowers. This also increases the overall home loan cost.
Some loans are fixed interest rate home loans. The interest rate remains fixed throughout the loan period. In such cases, changes in the repo rate will not immediately affect the monthly repayment amount. This will depend on which loan is selected.
What if rates remain unchanged?
If there is no change in the repo rate, there will be no significant change in the current repayment amount.
This will also be a relief for those who want to take home loans.
Interest rates are now almost constant. Home loans are now available to eligible borrowers at an approximate interest rate of 8.40 to 8.50 percent.