Home Loan Installments: Will it be Affected by the Repo Rate?

One of the crucial national economic news from mid-2020 was that RBI had brought the repo rate down to 4%, implementing a 200-basis-point reduction since 22nd May 2024. Due to these prevailing economic conditions, home loan interest rates were lowered nation-wide to support potential borrowers.

Interest rates play a vital role in the decision to avail a home loan. A low home loan EMI or interest rate is desirable to everyone. A borrowers’ ability to repay the borrowed amount, alongside RBI’s repo rate determines the applicable interest. A rise or fall in repo rate affects both existing and future borrowers.

Ideally, low repo rates mean reduced borrowing costs for all. When RBI reduces its repo rate, lending institutions also lower their interest rates. This implies that the credit offered to borrowers are available against a lower home loan interest rates, thereby reducing the EMI.

What is the repo rate?

Repo rate is the rate at which commercial lending organisations borrow money from RBI, in case of fund shortage. It is one of the many ways RBI keeps inflation under control. Borrowers must know what to expect from a repo rate cut.

During on-going inflation, the central bank may hike up the repo rate. This is done to discourage all commercial HFCs from borrowing funds, reducing the supply of available money in the economy and lowering the inflation rate.

However, when there is a drop in inflation, the central bank may lower its repo rate. This acts as an incentive, encouraging HFCs to borrow funds. They then provide these newly acquired funds to their customers, increasing overall circulation of money in the economy.

How are home loans and repo rates related?

Interest rates of home loans are presently dependent on –

  • MCLR rate,
  • the base rate, and
  • HFC spread in India

Therefore, the effective rate of interest on the advance or home loan EMI changes according to the benchmark rates of HFCs. Home loan rates vary and depend on the borrower’s eligibility as well. For example, their repayment capacity, assets, liabilities, savings history, income, spouse’s income, age, qualifications, stability, number of dependents, and continuity of occupation also help decide the eligibility factor and the rates.

In this regard, individuals can undertake measures to effectively bring down their EMIs even further.

How to reduce home loan EMI?

There are a lot of websites, online portals which give a summarised view of different interest rates, fee and other charges of HFCs. It is advised to compare the rates available before opting for one. Apart from this, one can also opt for a longer tenure, or turn to home loan refinancing to enjoy lower EMIs.

Since individuals usually take a home loan to buy their property of need, the property is mortgaged as security till the loan is repaid.

Further, top financial institutions and HFCs usually provide pre-approved offers to make financing more time-efficient. These offers are available on various financial products such as loan against property, home loan, etc. You can check your pre-approved offer by offering necessary information like your name and contact number.

It is advised to opt for a loan amount based on your way of living and regular expenses. A home loan EMI calculator comes as a useful tool before availing a loan to determine the best monthly instalments. So, home loan instalments as of early 2024 are at an affordable place due to the recent repo rate cut.

Read Also: Increase You Home Loan Eligibility: 5 Points to consider