The Reserve Bank of India (RBI) on Thursday decided to maintain the status quo on the repo rate, leaving it unchanged at its current level of 6.5%. This decision, announced after the Monetary Policy Committee (MPC) meeting, comes as no surprise to many economists and market analysts who had anticipated such a move amidst the prevailing economic conditions. While this decision holds implications for various sectors of the economy, it particularly impacts the real estate market, prompting home buyers to reevaluate their strategies and decisions.

The repo rate, the rate at which the central bank lends money to commercial banks, serves as a crucial determinant of borrowing costs across the economy. Its stability or change significantly influences interest rates on loans, including home loans. With the RBI holding the repo rate steady, home loan interest rates are likely to remain unchanged in the near term, providing some reassurance to prospective home buyers.

Commenting on the same, Adhil Shetty, CEO, Bankbazaar.com, said, “Compared to the 2023 levels, home loan rates have seen a notable decrease, with rates touching as high as 9% back then. Presently, the market offers some of the lowest home loan rates around 8.30%, with many lenders clustering around 8.50% for eligible borrowers. This presents an advantageous scenario for new borrowers who can secure loans at a low spread of under 2.00% over the repo rate.”

“Existing borrowers may face continued challenges for a few more months, possibly no more than a couple of quarters, until inflation subsides enough to justify a repo rate cut. These borrowers might be subject to a higher-than-market spread, exceeding 2.00% over the repo rate. Looking back to 2021 and 2022, the market saw its lowest rates around 6.50% when the repo rate stood at 4.00%, resulting in a spread of 2.50% over the repo rate. For borrowers from that period, there exists the option of refinancing their loans to enjoy a lower spread and reduced interest rates, thereby cutting down on interest costs,” added Shetty.

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For individuals contemplating entering the housing market, the decision to maintain the repo rate offers both opportunities and considerations. Here are some key points for home buyers to keep in mind:

Evaluate Current Financial Standing

Before diving into the housing market, it is essential for prospective buyers to conduct a thorough assessment of their current financial situation. This includes evaluating income stability, debt obligations, and savings. With interest rates expected to remain steady, individuals can use this period to strengthen their financial position and enhance their eligibility for favourable loan terms.

Monitor Market Trends

While the repo rate remains unchanged for now, it is crucial for home buyers to stay abreast of market trends and economic indicators. Factors such as inflation, GDP growth, and government policies can influence the direction of interest rates in the future. Keeping a watchful eye on these developments can help buyers make informed decisions about the timing of their home purchase.

Consider Loan Options

With interest rates likely to hold steady, home buyers may explore various loan options offered by banks and financial institutions. Comparing interest rates, loan terms, and repayment options can help individuals find the most suitable financing solution for their needs. Additionally, buyers should inquire about any special schemes or incentives introduced by lenders to attract customers in the current market scenario.

Affordability and Long-Term Goals

While low interest rates can make homeownership more accessible, buyers must assess the affordability of their prospective purchase. Beyond the initial cost of acquiring a home, individuals should consider long-term expenses such as maintenance, property taxes, and insurance. Moreover, buyers must align their housing decisions with their long-term financial goals, ensuring that homeownership remains a sustainable investment over time.

Shetty explained, “You have several prepayment options available to you, depending on your repayment capacity and the terms outlined in your loan agreement. One approach involves pre-paying 5% of your outstanding principal each year. For instance, on a 20-year loan, this strategy could potentially reduce your loan term to just 12 months, provided the interest rate remains constant. You have the flexibility to make lump sum prepayments once a year or split them into quarterly payments. With this method, approximately one-third of your loan is typically prepaid, with the remainder covered through regular EMIs. This not only accelerates your debt repayment but also leaves you with more funds for investment, as the prepayment amount decreases each year, freeing up additional funds for other financial needs.”

Another effective prepayment method is to voluntarily increase your EMIs. By paying a certain amount above your regular EMI every month, you can expedite your loan repayment process, ultimately becoming debt-free sooner. Additionally, you have the option to gradually increase your EMI each year as your income rises, further speeding up the repayment process.

In conclusion, the decision by the RBI to keep the repo rate unchanged has significant implications for home buyers. It is important to assess your financial situation and take a decision based on what suits your budget the best. If repayment is what you are looking at, go for it. But if you feel you can maximise your returns by investing in mutual funds, that will be perfectly fine as well.