Does Repo Rate Affect the Home Loan EMIs?

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Repo rate is the rate at which the Reserve Bank of India lends money to other financial institutions operating in the country. At present, the repo rate has been slashed to 4% from the previous 4.4%, after a 40 bps reduction in May 2020. Existing and prospective home loan borrowers need to be aware of the current repo rate and its importance since this factor can directly affect their loan interest rates and monthly instalments.

What should you know about repo rates?

Gaining a proper understanding of what is repo rate and how it affects home loan repayment is essential in managing the long-term financial responsibility efficiently. As stated previously, the repo rate is the interest rate that financial institutions pay to the RBI when availing funds from this institution. It is also known as an external benchmark rate, on which interest rates for various retail loans depend, including those for home loans. Besides this repo rate, financial institutions can rely on other accepted external benchmarks as well to decide on the retail lending rate –

  • The Government of India’s 3-month Treasury bill.
  • The Government of India’s 6-month Treasury bill.
  • Other FBIL-supported benchmark market interest rates.

One should know that the current repo rate is never equal to the interest rates on retail loans. However, any change in these benchmark rates tends to affect the interest rates offered to consumers as well, often in equal proportion.

How do repo rate changes affect home loan EMIs?

Now that you know repo rate meaning, you should gauge how changes to this benchmark rate affect your home loan EMIs. The following factors are altered when the repo rate rises or falls.

  • Home loan interest rate – Repo rate cuts result in the current home loan rates across various lenders. On the other hand, increasing the repo rate will result in most HFCs hiking their home loan rates as well. Thus, one of the tips to decrease your home loan interest is to wait for the perfect time, when the RBI maintains a trend of slashing repo rates when interest on the loan is charged at a floating rate.
  • Home loan interest outgo – Any changes in the interest rates will obviously also result in alteration of the total interest payable on such a credit. Thus, when interest rates fall, your total cost of the home loan reduces too.
  • EMIs – The current repo rate also influences your monthly instalments for the particular housing loan. With reduced interest liability, your lender will adjust your EMIs to reflect the new amount outstanding.

Still, one must remember that repo rate cuts do not result in an immediate adjustment of home loan rates. HFCs may take up to three months to enforce the lower interest charges on their loans.

As against the previous system of deciding interest rates based on an internal benchmark, the repo-linked benchmarking system RLLR has improved transparency and transmission time to reflect the changes in interest rates for home loans.

Other effective ways to reduce home loan EMIs

Borrowers can further implement other tactics to bring down home loan interest rate, and the consequent EMIs. Here is a guide to getting a better home loan interest rate, which, in turn, should decrease EMIs.

  • Maintain a decent credit score – Most lenders today focus on the credit score of an applicant before approving or rejecting home loan applications. Scores of 750 or above are preferred and highlight a borrower’s ability to repay the outstanding dues.
  • Limit loan principal – While you may be tempted to opt for high-value home loans, doing so can increase your EMI burden significantly. Instead, one should finance as much of a property’s price as possible from his/her own pocket as a down payment. It should reduce home loan principal, thereby keeping its EMIs in check.
  • Compare the various options – Before availing such a loan, borrowers must thoroughly consider all their options. Some lenders tend to offer home loans at competitive rates, which translate into lower EMIs.

One can also opt for longer tenures to lower monthly instalments. Select lenders offer great flexibility in this regard, with home loan tenures ranging up to 20 years.

Such HFCs also provide pre-approved offers, which reduce hassle and time-consumption when availing loans. These offers are available on several credit options, such as home loans and loans against property. You can check your pre-approved offer by submitting your name and phone number.

Consider these factors, along with the current repo rate, when opting for a home loan. These should help you limit EMIs so that they do not overburden your finances. With the availability of a lump sum amount, you can also opt to part-prepay your loan principal for reduced EMIs.

Reference links

https://www.thehindu.com/business/Economy/rbi-cuts-repo-rate-again-down-to-4/article31652475.ece

https://blog.finology.in/investing/rllr-vs-mclr

https://economictimes.indiatimes.com/wealth/borrow/banks-home-loan-interest-rates/articleshow/72218817.cms?from=mdr