How a reduction in Repo Rate impacts the home loan?

How a reduction in Repo Rate impacts the home loan?

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Opting for a home loan has been a go-to option for people in today’s time when it comes to fulfilling the housing dream. Thus, it can be said that home loans immensely contribute to the infrastructural development of the society. Keeping this in mind, the authorities have made various required steps towards making home loans consumer-friendly and affordable. Amongst many such directives, linking home loans with repo rate is the most effective one.

The Reserve Bank of India has made it mandatory for lenders to link the home loan interest rates to an external benchmark such as the repo rate so that the benefits of the same can easily be transmitted to the home loan borrowers. Thus, a reduction in the repo rate will clearly mean a reduction in the home loan interest rate. For instance, if the repo rate drops by 40-50 basis points, the home loan borrowers can expect a lower home loan interest rate as per the market standard by the same ratio. 

The repo rate is the rate at which the bank or the lenders in general, borrow funds from the Reserve Bank of India to further lend to the potential customers. Thus, when the RBI lends funds to the lenders at a low cost, the lender is likely to charge a low interest from the borrower as well. This reduction in repo rate will automatically lower down the home loan burden on the borrower. However, to avail, this benefit one must ensure that the lender has its home loan linked to the repo rate instead of other benchmarks. Also, the benefits of this provision can be attracted most when one has opted for a floating rate of interests. Some of the leading banks that offer repo rate linked home loans are State Bank of India, Axis Bank, Bank of Baroda, Kotak Bank and ICICI, among others.

Opting for home loans linked with repo rate is not only beneficial for new home loan borrowers but is also a go-to thing for existing home loan borrowers. This is because home loan borrowers who opted for a home loan linked with MCLR, before October 2019, can too avail this benefits of easier transition by switching to a home loan linked with repo rate. Repo rate linked home loans offer many benefits in comparison to MCLR linked home loans. While MCLR linked home loans are internally managed by the home loan lender, repo rate linked home loans involve transparency and easier transmission of lower interest rates, as they are regulated by the RBI. 

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Though the repo rate linked home loan is directly supervised as per the regulation of the RBI, yet it must be known to all that the repo rate linked home loan is inclusive of the repo rate and the margin charged by the bank. Thus, this means that though the reduction in repo rate will impact the home loan interest, yet it may not necessarily be the same across all home loan lenders offering repo rate linked home loans. Thus, on a concluding note, it can be said that the repo rate linked home loan has brought us near to the rising development as more and more people can now own a home.

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