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Finance

How Does Repo Rate Make an Impact on Home Loans?

On September 30, 2022, the Reserve Bank of India (RBI) raised the repo rate by 50 basis points to 5.90%. This is the fourth increase in the repo rate this fiscal year. Overall, the RBI has increased the repo rate by 190 basis points this fiscal year.

Repo rate is the rate at which the RBI lends money to financial institutions. Thus, a minute hike in this rate will affect the cost of borrowing. Since repo rate poses significant bearing on a borrower’s financial, it is crucial to know the details. Find them below.

Relation Between Repo Rate and Home Loans

Individuals wondering what is repo rate should know that this rate is one of the most important tools that any central bank has in its arsenal for exercising its authority to manage and maintain the economy’s financial system. This rate defines the interest rate at which the central bank lends money to commercial banks. The Reserve Bank of India (RBI) uses repo rates to manage and sustain healthy and sustainable liquidity in the financial system.

Having said that, when the RBI lowers the repo rate, banks’ borrowing costs fall. Banks are expected to eventually pass on this benefit to customers. Home loan interest rates, on the other hand, rise as the RBI raises its lending rate.

Evidently, repo rate has a direct effect on home loan interest rate. 

Other factors influencing home loan rates

Apart from the repo rate, a few other factors may impact the cost of borrowing. They are:

  1. Loan amount

One of the many factors that affect interest rate apart from repo rate is the loan amount. The loan corpus that one borrows directly impacts the loan EMIs. In this regard, the higher the loan amount, the more EMI one has to pay. 

To determine how loan amount may affect home loan interest, one can use a home loan EMI calculator. This online tool allows customers choose a loan amount depending on their repayment capacities. 

  1. Type of interest rate

Apart from the current repo rate, the type of interest rate on a housing loan also affects its interest rate. When it comes to interest rate charges, they come in three types, namely floating, fixed, and mixed interest rate home loans. 

While floating rate and fixed rate home loans are self-explanatory, mixed rate home loans have fixed interest rates for a set period of time before switching to floating interest rates. To compensate for the loss of interest income, lenders typically charge higher interest rates on fixed and mixed rate loan options, owing to the higher risk exposure.

Floating rate loans, on the other hand, allows borrowers to benefit from repo rate cuts. Furthermore, banks and financial institutions waive prepayment penalties on floating rate home loans.

  1. Credit score

When evaluating an application for a home loan, financial institutions consider the applicant’s credit score as one of the most important factors. Those with credit scores of 750 or higher are considered more creditworthy and have a better chance of getting a loan at a lower interest rate. Those with lower credit scores, on the other hand, may have their loans approved at higher interest rates.

Thus, before borrowing, it is crucial for individuals to know how credit score can determine home loan EMIs. Thus, it is advisable for prospective borrowers to review their credit report at regular intervals. This will allow them to maintain a healthy score and avail housing loans at affordable rates. 

Conclusion

Maintaining a higher credit score might also provide additional benefit to borrowers. For instance, several financial institutions across the country offer pre-approved loan offers to eligible existing customers. These offers are available on various financial products, including loans and property and home loans. They are especially customised and help in simplifying and streamlining the loan application procedure. Individuals can check their pre-approved offers by entering their names and contact details. 

Apart from knowing the various factors affecting home loan interest rate, it is crucial that borrowers know the factors affecting home loan eligibility. This will allow them to obtain a home loan at the most affordable terms.Evidently, repo rate is a crucial factor that determine how much interest a home loan borrower has to pay. Thus, in situations where the repo rate is rising, it is crucial for prospective home buyers to devise the perfect repayment strategy.

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