If you’re a home buyer, it’s important to understand the repo rate and how it impacts your home loan EMI. The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to banks. When the RBI increases the repo rate, it becomes more expensive for banks to borrow money, which usually increases home loan interest rates.
So, what does this mean for you? It means that your home loan EMI could go up! This blog post will discuss how the repo rate impacts home loan EMIs.
Let’s get started.
What is Repo Rate?
The Repo Rate is the interest rate at which commercial banks borrow money from the Reserve Bank of India (RBI). When RBI needs to control inflation, it increases the repo rate. As a result, home loan EMIs become expensive for borrowers as banks pass on the higher cost of borrowing to them. On the other hand, if RBI wants to encourage home loan growth, it will reduce the repo rate. This makes home loans cheaper for borrowers.
What is Reverse Repo Rate?
The reverse repo rate is the rate at which the RBI borrows money from commercial banks. An increase in the reverse repo rate means commercial banks will get a higher interest rate when they park their excess funds with the RBI. A reduction in the reverse repo rate would have the opposite effect – commercial banks would earn less on their idle cash and thus be more inclined to extend loans to borrowers. Home loan EMI calculator is also helpful in estimating the monthly installments.
How is Repo Rate Different from the Reverse Repo Rate?
The main difference between the two rates is that the repo rate is the rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which commercial banks lend money to the RBI. The repo rate is always higher than the reverse repo rate. Another difference between the two rates is that changes in Repo Rate directly impact home loan EMIs, while changes in the reverse repo rate indirectly impact home loan EMIs.
When RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. As a result, home loan interest rates also increase and become more expensive. On the other hand, when the RBI wants to make it cheaper for banks to borrow money, it decreases the repo rate.
Impact of Repo Rate on Home Loan
An increase in repo rate impacts both home loan borrowers and depositors. When the cost of borrowing goes up for banks, they are likely to pass on this increased cost to their customers through a higher Marginal Cost based Lending Rate (MCLR). This would mean an increase in your home loan EMI outgo.
On the other hand, if you have a home loan with a floating interest rate, an increase in repo rates would mean an increase in your home loan interest rate and, consequently, your EMIs.
However, it is essential to remember that the central bank uses the repo rate as a tool to control inflation and not as a method to make home loan EMIs cheaper or more expensive.
The Bottom Line
If the repo rate is increased, it becomes more expensive for banks to borrow money, which will be passed on to customers through higher home loan EMIs.
Therefore, if you plan to apply for a home loan, keeping an eye on changes in the repo rate is vital. You can use the home loan EMI calculator to check your home loan eligibility and monthly payments.
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