17 September, 2018 Financial & Technical
Repo rate or repurchase rate is the rate at which the central bank of a country (RBI in case of India) lends money to banks for short period by buying their securities (financial assets).
In the event of inflation, the repo rate is used by monetary authorities to reduce the money supply in the economy and thus helps in arresting inflation. The usual bank rate is the rate at which banks borrow money from the central bank without selling their financial assets and this rate is generally for a longer period. This is like borrowing money from someone and paying interest on that amount. Both bank rate and repo rate are determined by the central bank of the country and are dependent on the demand and supply of money in the economy.
Recently the Reserve Bank of India (RBI) increased the repo rate by 25 basis points making it to 6.25%. However, we will see through the article that not much impact is seen on your home loans and housing still is an affordable option for people. Ideally, a low repo rate should implicate low-cost loans for public and a rise in repo rates would mean a higher interest. However, the RBI has, now, presented the Marginal Cost of funds-based Lending rate (MCLR) regime hoping to change the functioning of commercial banks. There are tighter regulations for banks to now publish new interest rates every month for at least 5 tenures.
Existing loan borrowers will not see any differences in the EMI amount but there might be a possibility of a change in loan tenure. There will be a marginal increment in the interest rate which will not make any major changes to the loan structure. If you do not want to make any immediate changes to the loan structure, you can always decide to wait and observe the impact that the repo rate hike will have on the loan. Depending on the impact, you can choose to make changes.
One way to lessen the effect of these rate hikes on interest rates is to make a pre-payment to the bank. Pre-payment always helps to lessen the total amount of interest you will be paying to the bank. For people who are just starting out with a loan tenure, this option is very suitable. It is also advisable to try and increase one’s savings and pre-pay their loan to ensure that the interest paid does not exceed what you would pay normally. It is best to not make any changes to loans which are nearing completion.
For people who are looking to buy a property with a home loan, you can choose between a floating rate of interest and fixed rate loan. Though the RBI repo rate hike may seem to dampen sentiments in the real-estate market, there will likely be little or no impact. As most the home loans in today’s times are on floating rates, the increase and decrease in home loan rates do not impact the performance of residential property segment a lot and tends to set off over the long term. You can adopt a cautious approach for a quarter in case you are not very keen in making any changes to the loan structure and instead take some time to comprehend the effect of the rate hike on your loan. The Pradhan Mantri Awas Yojana is another very important scheme launched by the government which impacts the affordable housing segment of the country and aims to address the requirements of the economically weaker section (EWS) and the low-income group (LIG). It is a credit-linked interest subsidy based on your income and can be a big boon for those who are looking to buy homes with home loans and enables you to buy your dream home without dipping into your savings and sacrificing on essential life goals. The "Credit-Linked Subsidy Scheme” (CLSS) under Pradhan Mantri Awas Yojana (PMAY) acts as great savings in the for EWS, LIG and MIG people looking to buy quality homes and ensures hassle-free and quick disbursal of loans, thereby saving time.
Thus, it can be concluded that changes in the repo rate is not going to affect the affordability of your dream home. These adjustments are necessary evils for maintaining the order of our country’s economy, it does affect lending rates. However, as discussed above, there are several options in front of the buyer to absorb and minimize such affects to a negligible extent.