A powerful monetary tool, repo rate helps RBI exercise control over money flow in the economy. It is, in essence, the rate at which RBI lends money to various financial institutions. The Central Bank keeps modifying this policy rate depending on several macroeconomic factors. Such changes impact the realty sector by way of homebuyers who avail housing loans to purchase properties.
Now, as you know what is repo rate, here’s how it impacts loan EMIs.
Usually, home loans come with up to 20 years of tenure throughout which, borrowers need to repay their advance borrowed through EMIs. This repayment amount comprises both the principal and the interest amount. While principal remains the same, even a minor change in interest rate impacts the total cost of borrowing significantly.
As per the RBI’s mandate, lending companies must link their housing loans to external benchmarks, including repo rate. Those who choose repo rates as their preferred benchmarks opt for the Repo Rate Linked Lending Rate model. As the repo rate meaning is clear, know that every change that the central bank initiates impacts housing loan EMIs directly.
Nonetheless, lenders are also allowed to levy an additional risk premium based on how risky a borrower is. The final interest rate is, thus, determined based on RLLR, risk premium and spread.
The RLLR scheme ensures to pass on the benefits of rate cuts compulsorily to borrowers. When home loans are linked with repo rate, it is essential for financial institutions to revise their rates of interest periodically.
The current repo rate as of November 2020 remains 4%, while reverse repo rate remains 3.35%. Recently, leading housing finance companies have slashed their interest rates on housing loans owing to the decrease in repo rate, consequently lowering the cost of home loans.
