Buying your own house is a significant milestone and a matter of pride for most people. And whether you move into a new home or build one from scratch, a home loan is an excellent way to finance it. However, if you are a first-time borrower, you must be aware of the critical aspects surrounding a housing loan.
The loan interest rate determines your loan repayment amount and directly impacts your monthly EMIs. But have you wondered how the lenders determine the home loan interest rates? The crucial factor that influences the housing loan rates is the repo rate decided by the Reserve Bank of India (RBI).
Let’s take a closer look at repo rates and how they shape your housing loan EMIs.
What are repo rates?
Just like borrowers pay interest to borrow credit, similarly, lenders have to pay interest to borrow funds from the RBI. This rate of interest is known as the repo rate.
The term ’repo’ is short for ‘repurchase agreement’ or ‘repurchasing option’. It is used as a monetary tool by RBI to keep inflation under control and enjoy a certain profit. The repo rate changes whenever there is a change in economic factors.
Now, how does the repo rate affect the real-estate sector, home loan interest rates and essentially your home loan EMIs? Read further to find out.
Impact of repo rates on home loan EMIs
When there is a period of inflation, RBI generally raises the repo rate, which discourages financial institutions from borrowing money. It reduces the liquidity or supply of money in the economy and tames inflation.
On the other hand, when prices of goods and services drop significantly during deflation, RBI decreases the repo rate. This acts as an incentive for lenders to borrow money. Thus, more funds are available for the customer.
But how does that affect homebuyers like yourself? The answer is simple. Whenever RBI changes the repo rate, the cost of borrowing for home buyers is affected.
Hence, a high repo rate impacts the housing loan rates offered by your lender, thereby affecting your EMIs and repayment amount. Using a home loan EMI calculator can help you plan your loan repayment and get hold of your monthly instalments.
The bottom line
Due to the COVID-19 pandemic, the country is going through economic turmoil. Therefore, RBI has slashed the repo rates to an extent to provide some respite to home buyers. Financial institutions quickly altered their interest rates as per the changes made by the central bank. Thus, you must check the repo rates regularly if you are in the process of purchasing a house.
Borrowing home loan from a reliable lender is a wise move, but you must be aware of all the essential factors. After checking your home loan eligibility, compare interest rates from different lenders to make an informed choice.
