Repo Rate Impact on Home Loan

4 min read

Repo Rate Impact on Home Loan

The Repo Rate is linked with home loan rates of banks and this move has been made by the Reserve Bank of India. This rate signifies the rate of interest at which the RBI lends money to various banks so that they can in turn satisfy their customers. Interesting right? This article is all about the repo rate, how repo rate affects the home loan, repo rate EMI calculator and much more.

How does the Repo Rate affect home loans?

If there is a floating rate of interest, then only home buyers take it up, as in if there is a fall in interest then the borrower has to wait for another year or more till the situation normalizes as most of the banks rely on the scheme of 1 year MCLR (Marginal cost of funds based on lending rate). The fall or rise in the repo rate affects both the existing and new borrowers of home loans. When the repo rate decreases then the rate of interest of the banks also falls and at the end of the day it becomes easier for the customers to pay off the loan easily in EMIs. 

What is the impact of RBI repo rate cut on home loan?

You must be wondering that what impact repo rate can have! Let’s clear your doubts.

Repo rate is totally controlled by the Reserve Bank of India and it has a huge impact on the people of the country as it is linked with home loans. The Repo rate changes with some economic factors. RBI modifies its rates and that really impacts on all sectors, while some gain profit and some suffer huge losses.

Repo rate does directly affect the home loans and similar types of loans. This fluctuation of repo rate is done just to control the inflation of the country. If RBI decreases the repo rate then more people will borrow from the bank as there will be decrease in the rate of interest of home loans and this way inflation can be controlled a bit.   This also results in bringing down the rate of lending the money by the banks, which becomes beneficial for some. So, in simple words if there is a repo rate cut then it affects the banks as there is a cut in the interest rates of home loans as well, thus it borrowers become positively affected by this. 

What is Repo rate linked home loan?

Repo rate linked home loan or Repo Rate linked lending rate (RLLR), in simple words mean that this is the lending rate that very well linked with RBI’s repo rate. In the year 2019, it was an order that all the home loans like car loans or home loans that are sanctioned by the banks itself have to be linked to an external benchmark. The RLLR will be kept floating and would change as in when the rates from RBI changes, so this helps the borrowers as well.

Even though it is floating the RLLR home loan has to check on certain mandatory points like, what the loan amount is, how any years and much more. Also whatever the floating interest is, 1% will always be a margin charge that banks are free to charge from the borrowers.

Does repo rate influence interest rates?

Absolutely it does. Repo rates do influence the interest rates of banks and also affects it. As mentioned earlier The Reserve Bank of India is the main head of the change in repo rate and it is the rate at which RBI lends money to the other banks. RBI has set the repo rate at 4% for the banks as of now. But at times it becomes difficult for the banks to borrow money from RBI and even if they do so, it is compensated from the customers when they borrow money from the banks. This generally happens when there is an increase in repo rate.

Interest rate for normal customers would be repo rate+ the normal interest rate that he took loan for. Thus, the increase in repo rate will give rise to the increase in the interest of the banks and in turn this will also increase the monthly EMIs. Now that’s how your finances get affected by the repo rate of RBI.

What is the home loan repo rate?

The Repo rate set by RBI is 4%. Nowadays, the home loan interests of banks are linked with RBIs repo rate. So the calculation becomes:

Repo rate Linked Lending Rate (RLLR)= Repo Rate+ Margin that is charged by the bank.

Whatever percentage the bank charges as a margin rate stays fixed and they are liable to charge so, which is around 1% of the total. 

The current Repo rate for home loan set by RBI is 4%. Nowadays, the home loan interests of banks are linked with RBIs repo rate. Thus, the maximum banks follow the repo rate linked home loans. So the calculation becomes:

Repo rate Linked Lending Rate (RLLR)= Repo Rate+ Margin that is charged by the bank.

Whatever percentage the bank charges as a margin rate stays fixed and they are liable to charge so, which is around 1% of the total.

To get a bit of clarity you can view this recently updated table below on Repo rate linked home loan, that gives you a detailed and generalized structure of the interest rates of home loan and how the repo rates work and what are the banks that would guide you through. 

Repo Rate linked home loan vs. MCLR (Marginal cost of funds based on lending rate)?

How about going back to our school days, where we use to draw tables to learn differences between any 2 or 3! Here, we will know about the basic differences between the Repo Rate linked home loan & MCLR. 

Repo Rate linked Home Loans

MCLR

As per the recent schemes, the rate of interest is low

Rate of interest is high

External benchmark by RBI allows bi-monthly monetary policy

Internal benchmarks are revised by banks from time to time

The frequency of reset is not more than 3 months

The frequency of reset varies from bank to bank and is from  month to even a year

 The Effect of Reverse Repo Rate on home loans

RBI lends money to the banks as repo rates but at the same time banks park their money at RBI at a lower interest rate and this is known as Reverse Repo Rate. This is always lower than the normal repo rate, because RBI aims to earn more from lending money than from borrowing some from the banks itself. Reverse repo rate also discourages the banks from keeping a huge amount of money at RBI so that the rate of interest also increases simultaneously. If the reverse repo rates get increased, then the banks might also increase the home loan lending rates to the people. Similarly, if the reverse repo rate goes down then the home loan rates will also go down. This is how the reverse repo rate affects the home loans and also the banks. 

At the time to inflation, RBI increases the reverse repo rate, which allows the bank to keep a certain amount of money in RBI at a good rate of interest..This high rate of interest in turn doesn’t allow the banks to lend money to the customers and in turn save the money for the fixed high interest at RBI. This in turn controls inflation.

Also read : Repo rate stays unchanged at RBI MPC meeting

FAQS

Q. How much is the Repo Rate?

RBI or the Reserve Bank of India, charges a Repo rate of 4%.  

Q. How much is the Reverse Repo Rate?

 RBI or the Reserve Bank of India, charges a Reverse Repo rate of 3.35%.

Q. How does Repo Rate work?

The rate at which RBI lends money to the other banks is known as the Repo Rate. When a bank is facing shortage of money then this comes into action. Often to balance the inflation of economy of the country, the repo rate is cut and that has an impact on home loan and also in turn allows more customers to borrow loans from banks which would balance the situation.

Q. What will repo rate cut down cause?

There won’t be any change in home loan interest till the 3 months, after that if the repo rate is cut down then your interest rate will also reduce.

Q. Which banks do offer Repo rate linked home loans?

The reputed banks like ICICI bank, Axis Bank, PNB, IDBI, Bank of Baroda, Bank of Maharashtra, Canara bank, Central Bank of India, UCO Bank, Kotak Bank, Bank of India, HSBC Bank, IOB, OBC, United Bank of India etc, offer repo rate linked home loans.

Q. What are the processing fees of Repo rate linked home loans?

It is 0.13%. In monetary terms it is Rs.500 to Rs. 5000.