Among the various methods opted by the central government to control inflation, the repo rate in India’s finance sector deserves special mention.
What is the repo rate?
Repo or repurchase agreement is a short-term agreement to sell securities only to buy them back at a comparatively higher price.
In this agreement, one who is buying the repo is effectively a lender. The other party who is selling this repo is the borrower, as the one who is lending is credited with an implied interest rate during the repurchase. This inferred-interest rate on this repurchase agreement is called the repo rate.
What is a repo-linked loan?
All retail loans such as home loans are governed by the benchmark set by the governing body, which is the Reserve Bank of India. In its circular, RBI has directed that interest rates on home loans offered by authorized financial institutions in our country have to be linked to an external benchmark.
Among several options, most financial institutions have opted for RBI’s repo rate as their choice of external benchmark. The interest rate linked to RBI’s repo rate is called Repo Linked Lending Rate or RLLR. Loans availed on this interest rate are called repo-linked loans.
Factors to consider availing such loan
As a borrower, you should consider these factors before availing a repo-linked home loan –
- RLLR has a direct influence on your home loan EMIs.
- Financial institutions are now required to reset the interest on home loans every three months.
- Lenders add a certain spread rate on the repo rate to fix the interest rate of a home loan. This spread rate relies on the operating cost of the housing loan and the creditworthiness of a borrower.
Hence, before availing a home loan linked to the repo rate linked loan, you should keep these above factors in mind.
