Impact of Repo Rate on Home Loan Interests

by Radha Lakshmi Blogger

A repo rate refers to the interest rate at which financial institutions such as commercial banks borrow money from the Reserve Bank of India (RBI) during the times of cash crunch. A repo rate is one the essential tools of RBI in order to the inflation in check. Banks have to provide eligible securities such as treasury bills to RBI so as to avail overnight loans. A repo rate functions in the same way as borrowers who take loans from financial institutions, who grant financial assistance by charging a certain interest rate amount.

A high repo rate will result in higher cost of short-term funds while the opposite will bring the interest amount down. Hence, if the repo rate is less, banks charge lower interest rates on the loans offered to the individuals. Additionally, a lower Repo Rate can also contribute greatly towards generating a positive growth of the economy.

When it comes to home loan aspirants, the repo rate makes quite an impression. Since the home loan interest rate is calculated as the addition of cost of funds and profit margin, the obtaining solution of loan interest rates is of the paramount value. The impact of current repo rate as of on 7^th February, 2019 will have an impact on both the existing and the future borrowers. Leveraging the current rate on both loan EMIs and existing borrowers, the decreased repo rate will play an integral role. Your associated bank might augment the Marginal Cost-based Lending Rates (MCLR) when it comes to understanding the impact of repo rate changes.

The change in the repo rate is likely to result in an increase in the interest to be paid on a housing loan. The impact on existing home loan borrowers who have availed using home loan eligibility calculator, won’t see any changes in their EMI amount even though many banks have changed their MCLR in response to the hike rate by RBI. One method to reduce the impact of these hikes on interest rates is to make a pre-payment to the bank. Pre-Payment on a home loan bring down the principal amount along with reducing EMIs and total home loan interest rates on it.

If you do not want to make any immediate changes to the loan structure, one can always decide to wait and observe the impact that the repo rate hike will have on the loan. Depending on the impact, home loan aspirants can choose to make changes.