To understand how a change in the repo rate can affect the home loan EMI, let us begin with learning what is the repo rate.
The concept of repo rate
The repo rate is the Reserve Bank of India (RBI) when the commercial banks seek a loan from the central bank. Commercial banks take loans from the central bank when there is a shortage of funds. The repo rate comes in handy to control the inflation in a nation and is monitored by the Central authorities.
Whenever there is a drop in inflation, the RBI reduces the repo rate, attracting commercial bank borrowings altogether. It acts as an incentive and encourages the commercial banks to borrow funds and as a result, improve the supply of money.
How does the repo rate affect a home loan?
It is everyone’s dream to build a safe and secure family house. Several individuals often choose to move into a ready apartment whereas, on the other hand, some individuals prefer to build a home brick by brick. Whatever may be the choice, a home loan aids the need for finance.
People need to assess their fund requirements and thoroughly study their essential needs. Several factors are considered while applying for a home loan, including interest rate, monthly EMI, and the home loan tenure. The cost to be borne by the borrower is an accumulation of all these factors.
One of the essential pillars of a home loan that significantly affects the borrower’s cost is the home loan interest rate. The home loan interest rate is directly affected by the repo rate charged by the RBI while lending funds to the commercial banks for offering loans to their customers. Thus, the repo rate significantly affects the home loan interest rate. The lower the repo rate for the commercial banks, the more attractive the home loan interest rate for the borrowers.
How does this work?
The RBI has put up a brave front in the face of the pandemic-induced turmoil in the country and slashed the repo rate to an all-time low rate of 4.40%, which is a 75-basis point reduction. The central bank adopted this move, expecting banks to reduce the home loan interest rate further.
The RBI has established the Marginal Cost of funds based Lending Rate i.e., the MCLR, to build and sustain transparency in the modus operandi of commercial banks. The MCLR monitors the implementation of change in the interest rates and ensures it follows suits at the same time when there is a revision in repo rate.
It helps build consumer confidence in commercial banks, ensuring there is no delay in reducing home loan interest rates after the decrease in the repo rate.
Banks’ home loan interest rates have hit an all-time low amid the pandemic. Borrowers should work out the estimated cost to be incurred with the help of the home loan EMI calculator. The home loan EMI calculator is free of cost and is super convenient and smooth to use. The home loan EMI calculator makes the entire process hassle-free and gives you the required output in no time. So go on, live the dream and build your home by applying for a home loan!