For most individuals, owning their own houses is a matter of great pride. It is without a doubt a significant achievement, especially considering the expensive real estate prices in India. Now, most people apply for home loans to arrange for the finances required to buy their houses. However, it is important to focus on the interest rate of a home loan before applying for one. This is because the home loan rate has a major impact on the loan’s EMI payments.
Many borrowers wonder how changing interest rates affect their EMIs. If you are a borrower thinking about the same, the first thing that you need to understand is how a repo rate works & how it affects your home loan.
- What is a repo rate?
A repo rate is the rate at which commercial financial institutions borrow money from RBI (Reserve Bank of India) in case they are falling short of funds. RBI makes use of the repo rate to keep control of inflation. In case of a rise in inflation, central banks increase the repo rate. This is done with an aim to dissuade financial institutions from borrowing money. As a result, there is a decrease of money supply in the economy, which helps in getting inflation under control.
- How does the repo rate impact home loan interest rates?
A lot of home loan borrowers opt for a floating interest rate. If your home loan is with a floating interest rate too, there might be a one-year wait before the revised rate sets in. This is because most lenders have home loans that are based on the 1-year MCLR (Marginal Cost of Funds based Lending Rate). Generally, the repayment tenure of a housing loan lasts for a maximum period of 20 years. This is a long period and even a slight increase or decrease in the home loan interest rate could have a considerable difference on the overall cost of the loan.
- So, what does this change mean for the borrower?
A decrease in the repo rate impacts both existing as well as new borrowers. Most public sector banks are the first to lower their interest rates in such situations. Your lender might lower the MCLR in case the repo rate falls. This would have a direct impact on the interest you pay on the home loan and will lessen the cost of your monthly instalments.
Housing loan interest rates in India are currently dependent on the base rate and the MCLR rate in India. This makes the housing loan interest rate vary as per banking benchmark rates. Also, do not forget to make use of a home loan EMI calculator. The reason for this is so that you are aware of the housing loan’s monthly instalments. All that is needed by this calculator is the loan amount, tenure, and interest rate. With these details, it will give you the estimated monthly instalments of the loan. This will give an idea of whether the loan is affordable.