Home loans provide an accessible way to finance your dream home, but the cost of borrowing depends on several factors. While interest rates and fees (such as processing fees and prepayment charges) are commonly discussed, the current repo rate is often overlooked, yet it can significantly impact your home loan payments.

This article intends to give you a better understanding of what the repo rate is
and the effect of the repo rate on home loan payments.

What Is Repo Rate?

The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial lending institutions. In this transaction, a lending institution borrows money from the RBI by selling securities such as government bonds and treasury bills. The borrowing institution repurchases the securities at a later date, at a slightly higher price that includes interest. This interest is what we call the repo rate or a ‘repurchase agreement rate.’ 

How Does the RBI Repo Rate Affect Home Loans

Here’s how your home loan is linked with the repo rate:

Cost of Borrowing

When the RBI reduces the repo rate, it allows lending institutions to borrow money at a lower cost. Usually in this scenario, lenders are expected to pass on the benefits of the reduction to borrowers, resulting in lower interest rates. Conversely, a repo rate hike increases home loan interest rates.

Interest Rates

The impact of the repo rate on home loan interest also depends on the type of interest rate. A floating or variable rate of interest is tied to the current policy rate while a fixed interest rate remains unaffected by repo rate changes.

Home Loan EMIs

How the repo rate impacts home loan interest is key to understanding the connection between the repo rate and home loan EMIs. A lower policy rate usually leads to lower interest rates, making home loan EMIs more affordable. Conversely, an increase in the repo rate leads to higher EMIs.

Loan Eligibility

Similar to the impact of repo rate on home loan EMI, it can also affect your eligibility for a home loan. When interest rates decrease, the affordability of EMIs increases, which may improve your chances of qualifying for a loan.

Prepayments

Since home loan EMIs change with the repo rate, a lower interest rate may encourage you to make prepayments. Prepaying your loan can reduce the overall loan burden and help you complete repayment faster.

Loan Tenure

When the RBI increases the repo rate, lending institutions typically increase home loan interest rates. This may lead to an increase in the home loan EMI, which could lengthen the repayment tenure. On the other hand, a lower repo rate may reduce the repayment tenure, as it lowers the EMI.

Thus, the cost of home loans and the repo rate are directly correlated, affecting interest rates, EMIs, eligibility, and loan tenure.

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Conclusion

Understanding the relationship between repo rates and home loans is crucial for making informed borrowing decisions. By staying updated on the RBI policy changes and their impact on interest rates, you can better plan your home loan journey.

If you’re considering purchasing your dream property, we offer home loans of up to 90%* of the property value with flexible tenures of up to 30 years. Apply today with our convenient online application process or contact us for further information.

*Please note that repo rate has no effect on the interest rates of loans offered by Grihashakti. Our interest rates depend on our policy, as well as the borrower’s profile and requirement. This article is for your understanding only, and may be applicable to borrowers of lenders whose interest rates depend on repo rate. To avail a home loan or a loan against property, apply online today.