The RBI increased the repo rate — the rate at which the central bank of the country lends funds to the commercial banks — by 50 basis points (bps) to 5.40 per cent in its bi-monthly policy meeting today. The decision is going to impact a large number of home loan borrowers and impact the prospective borrowers who are planning to buy a new house.
Here is how the repo rate influences the home loan rates.
Every time a home loan is taken, the first thing that comes to mind is the interest rate. It is one big factor that can influence a financial decision significantly. Buying your home is one of the biggest financial decisions as it involves the transaction of a large amount of money. The last couple of years has been a golden period for borrowers who got home loans at the lowest interest rate historically. However, the time seems to be changing now owing to rising inflation levels after the Covid-19 pandemic lockdown and a geopolitical situation like the Russia-Ukraine conflict.
What Is Repo Rate?
A repo rate is a rate at which the RBI lends money to the banks. If the repo rate increases, that means the commercial banks borrow money at a higher cost from the central bank, and they, therefore, lend it at a higher cost too. The recent rise in repo rates has signalled that the cheaper home loans are now history, and both existing and new borrowers will now have to pay more interest to their lenders.
How Does Repo Rate Impact Homebuyers?
When you take a home loan at a floating rate, you borrow at the current market rate with the condition that you are liable to repay your loans as per the current market rate. Since most home loans are now linked to the repo rate-based lending rate, whenever repo rates go up, your floating rate home loans will become costly, and there will be a sequential rise in the EMIs.
Adhil Shetty, CEO, Bankbazaar.com, says, “The RBI has increased the repo rate for the third straight time by 50 bps to 5.40%. The total hike so far in 2022 stands at 140 bps, which withdraws the total cut of 115 bps passed in 2020. These hikes will gradually play their part in controlling the high liquidity pumped into the market in 2020. It will also help in taming inflation, which has remained above the RBI’s upper tolerance level for several months now.”
“Current borrowers on floating rate loans would see their loan tenors increase with this hike. One of the methods you can use to evaluate your loan rate is by checking the premium you are paying above the repo rate. If you are a prime borrower (credit score over 750, stable income, loan payments on time), you can get home loan offers at a premium of around 250-275 basis points over the repo rate. The premium varies from lender to lender. So, the range could be lower or higher depending on who you are and whom you are borrowing from,” adds Shetty.
What Can Homeowners Do?
It is advisable to prepay your home loan either fully or partially regularly. If you pre-pay 5% yearly, you can significantly reduce an increased interest rate burden. Existing borrowers can refinance to a lower interest rate or increase their EMIs to avoid paying more interest on their existing loans.