Home Loan gets cheaper! RBI makes repo-linked interest rates mandatory

by Bhavna S. Financial Advisor

After a recent ruling, the RBI has made it mandatory for banks to link the repo-rate based interest rates to all floating home loans. This will prove to be beneficial for the customers, who in the past, have complained about banks not offering them such benefits. The repo-rate based home loans will lower the EMI burden for the borrowers to an extent, but the EMIs will frequently change as well. Read on to know more.

Understanding the repo-based interest rates

Banks offer different types of home loans, with different clauses related to the interest rates.

The fixed interest rate - As the name suggests the interest rate on such a home loan is fixed for the entire duration of the loan tenure. So if a person takes a home loan for 10 years at a rate of 8.5% in 2019, he will pay the interest of 8.5% on all the EMIs till 2029.
The floating interest rate - Here, the interest rate of the home loan keeps changing from time to time. The rate depends on various aspects such as the remaining home loan balance, the repo-rate, etc.

When it comes to the actual home loans, there are two further ways in which the interest rate is calculated. They are:

MCLR-based loans - The the first type is the marginal cost of funds-based lending rates or MCLR-based loans. This type of interest is calculated by taking the internal reference rate of the lenders into account. This is usually offered on a fixed rate home loan.
Repo rate -based loans - The repo rate-based interest rate is calculated after taking the RBI’s repo rate figures and guidelines into account. The repo rate-based the lender is usually offered on floating interest home loans.

Effect of repo rate based loans on consumers

The repo rated based loans will surely benefit home loan seekers. This is because the RBI offers the funds to the banks at lower rates of interest. In a repo rate based home loan, the banks transfer this advantage to the borrowers, thereby offering the loans at a lower rate of interest. The volume of the EMIs, as well as the tenure of the home loan, can be reduced when a repo rate based home loan, is given.

Important factors related to repo rate based home loans

Interest rate revisions - The banks are now compelled to revise the interest rates on the floating home loans every quarter. They are free to do so each month as well, as per the guidelines issued by the RBI.
EMI changes - The EMIs will frequently change. In most cases, the EMIs will reduce, but if there is an economic crisis in the country and the RBI increases the repo rate, you will notice a rise in the interest rate, and consequently in your EMIs.

The final word

With the repo linked home loan interest rates making its foray into the home loan sector, the customers surely have reason to celebrate. However, as a borrower, you need to be cautious. Keep all the points mentioned above in mind and then choose the home loan with care.