20 APRIL, 2022

A lot of people tend to opt for housing loans as it is easily available and can be applied online. However, it is important to know that interest rates on home loans are dependent on market rates and economic factors. One such factor is the repo rate. The repo rate is determined by the Reserve Bank of India (RBI) and has a significant impact on your home loans. Before you avail a home loan, you must know all about the repo rate and how it impacts your home loan.

What Is Repo Rate?

The repo rate is the rate at which the RBI lends money to commercial banks. It is usually reviewed in each monetary policy and is measured in percentage. It is used as benchmark for setting interest rates on loans When there is high inflation, the RBI increases the repo rate so that commercial banks do not borrow money. This consequently reduces the liquidity in the market, controlling inflation.

How Does Repo Rate Impact Home Loan?

If you have availed a floating interest rate home loan, your interest rates can change with a change in the repo rate. Usually, lenders are expected to pass on the benefit of reduction in the repo rate to borrowers.

However, if you have taken a fixed interest rate home loan, you will not be impacted by a change in repo rates instantly. But, once your lock-in period expires (usually one year) or when you decide to switch to a floating interest rate home loan, your home loan equated monthly instalments (EMIs) will also be affected.

Key Impacts of Repo Rate Cut on Home Loans

Your EMI's May Come Down

If there is a fall in the repo rates, your EMI value can reduce consequently. A reduction in the EMI value can have a positive impact on your monthly budget. You can save money for your other goals and manage your finances better. A lower EMI also gives you more liquidity and flexibility to plan other purchases, saving for your children’s education or other essential expenses.

Interest Rates for New Loans Are Likely to Get Cheaper

A reduction in repo rate does not automatically translate into lower home loan interest rates for existing borrowers. However, if you are availing a new loan, you could get better interest rates and enjoy lower EMIs.

In conclusion, the repo rate affects many financial products in India, including home loans. Therefore, it is important to understand what repo rate, why it is important, and how it impacts the country's economy and consumer spending. Whether you are buying a home or simply planning your financial future, you will want to evaluate the impact of repo rates on home loans in India.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.