Home loan repo rate

Home loan repo rate

Earlier in January, when the Reserve Bank of India (RBI) announced a cut in the repo rate (rate at which the RBI lends money to commercial banks) by 0.25%, my friend was ecstatic. Looking to invest in a home in the coming fiscal year, he was excited to learn about the possibility of a lower interest rate on his home loan.

Last Wednesday, when the RBI announced repo rate revision by 0.25% basis points (BP) under the liquidity adjustment facility, it brought down interest rates from 7.75% to 7.5%. Now things look much better. Of course, he wanted to understand what this meant for him as a prospective home buyer.

Based on my discussions with Priya Sunder, co-founder of the award-winning wealth management company, PeakAlpha, this was the picture I was able to give my friend:

  • A reduction in repo rate technically means that banks are able to borrow at a lower rate and therefore in turn bring down interest rates at which they lend.
  • One thing that needs to be understood is the fact that reduction in repo rate takes a while to come into effect. This happens at 2 levels – home loan interest rate and deposit in bank interest rate. Banks may choose to implement the rate cut simultaneously on both products or only on a single one. It may take up to three months for it to feature in banks.
  • The reduction of repo rate by 0.25% basis points will not really make a difference to an individual and their loan rate right now, but it is significant in terms of things to come in the economy. This may be seen from the fact that there is already a second revision in rates and that too before the scheduled policy review meetings of the RBI.
  • For a person with a Rs. 10 lakh home loan, it simply means that there is a reduction of Rs. 150 on the EMI which may work out to Rs. 2000 a year in savings.
  • Considering all the market indicators right now, with inflation being under tight control, this double reduction in repo rates is definitely an indicator of better things to come.

With the cost of financing going down, the benefits will percolate down to the general consumer, allowing people like my friend to consider buying a home now.

Takeaways

  • Revision in repo rates means that home loans become cheaper to the prospective home buyer in terms of interest rates.
  • This may make a significant different to those with a larger home loan of Rs. 50 lakh and above.

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