The repo rate is the interest rate at which the RBI lends money to commercial banks and financial institutions.
On February 7, 2025, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points, lowering it from 6.50% to 6.25%. This strategic move, aimed at stimulating economic growth, marks the first rate cut in nearly five years.
But what exactly is the repo rate, and how does it impact your home loan interest rate? Understanding RBI’s monetary policy is crucial for borrowers looking to make informed financial decisions.
Let’s explore how changes in the RBI’s policy repo rate influence the interest rate on housing loans and what it means for you.
Understanding the Repo Rate
The repo rate is the interest rate at which the RBI lends money to commercial banks and financial institutions.
When the repo rate decreases, these financial institutions can borrow funds at lower costs, often encouraging them to lower home loan interest rates for customers.
For existing borrowers with floating or variable interest rates, a lower repo rate can translate into reduced EMIs (Equated Monthly Instalments) and overall interest costs.
Additionally, lower interest rates can encourage new buyers to invest in residential properties, boosting demand in the real estate market.
Impact of the RBI Monetary Policy Changes on Borrowers
Here are the key aspects every homebuyer should know regarding policy rate changes:
1. Transmission of Repo Rate Cuts
With a repo rate cut, EMIs are likely to decrease over time, but the speed of adjustment depends on the lender’s transmission mechanism. While some lenders revise rates promptly, others may take longer.
Additionally, certain lenders use benchmarks like the Retail Prime Lending Rate, which are not directly linked to the repo rate.
Moreover, although the repo rate influences overall interest rate trends, some lenders determine their rates based on factors such as funding costs, market conditions, risk assessment, and strategic priorities, leading to variations across lenders.
2. Impact on Long-Term Home Loan Payments
Since home loans are typically long-term commitments (usually 20 to 30 years), even a slight reduction in interest rates can lead to significantly lower total interest costs, reducing the financial burden on borrowers.
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You can use a home loan EMI calculator, available for free on the websites of reputed lenders such as SMFG Grihashakti, to assess the potential impact of a lower interest rate on your monthly payments and overall interest costs. However, please also note that some lenders like SMFG Grihashakti provide interest rates based on the retail prime lending rate and not the repo rate. It is advisable to check the policy of the lender before borrowing.
3. Boosting Liquidity in the Market
Through its monetary policy, the RBI manages liquidity in the financial system. When liquidity increases, financial institutions have more funds to lend, often leading to competitive interest rates for new borrowers. This, in turn, makes home loans more accessible.
4. Improved Economic Growth
A cut in the current home loan interest rate leads to lower overall loan costs, encouraging more individuals to purchase properties. Since real estate is a valuable investment, homeowners may benefit from long-term returns through property appreciation and resale.
Additionally, increased demand in the housing sector stimulates real estate growth, generating employment and contributing to the overall economic development of the country.
What Steps Must Existing Home Loan Borrowers Take?
Existing home loan borrowers with floating interest rates can proactively optimise their loans by negotiating with their lenders for a lower interest rate.
To improve the chances of a favourable outcome, maintaining a high credit score, a solid repayment history, and a strong relationship with the lender is crucial.
However, note that the final decision to adjust the interest rate rests solely with the lending institution.
If negotiations do not yield a satisfactory outcome, borrowers may explore a home loan balance transfer, which involves shifting the outstanding loan to another lender offering a lower interest rate or better loan terms.
Before opting for a balance transfer, it is essential to consider associated costs such as processing fees, administrative charges, and any prepayment penalties imposed by the current lender. For the transfer to be truly beneficial, the potential savings must outweigh these costs.
Additionally, a balance transfer is most effective in the early years of the loan when the interest component of EMIs is higher. If only a few years remain in the tenure, the financial benefits may not justify the time, cost, and effort involved in switching lenders.
Borrowers with fixed-rate home loans can also consider switching to a floating-rate loan to take advantage of potentially lower interest rates and EMIs.
Additional Factors to Consider
Home Loan Prepayment
While lower interest rates can reduce the monthly EMI burden, borrowers may consider prepaying their home loan, if financially feasible, to repay the loan faster and reduce debt quicker. As per RBI guidelines, lenders cannot levy prepayment charges on floating-rate home loans taken for non-business purposes. However, for fixed-rate home loans, prepayment charges may apply, depending on the lender’s policies.
Credit Score and Loan Eligibility
Even if lenders reduce interest rates in response to the RBI’s repo rate cut, the final rate offered to a borrower depends on several factors, including age, income, employment history, and creditworthiness. Generally, applicants with a credit score of 700 and above are favoured for lower home loan interest rates.
Conclusion
RBI’s monetary policy decisions, particularly changes in the repo rate, play a crucial role in shaping home loan interest rates. While a rate cut may lead to lower rates and reduced EMIs for borrowers, the actual impact depends on individual lender policies and borrower eligibility.
Staying informed about RBI’s monetary policy and understanding how it influences borrowing costs is key to making informed financial decisions.
*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.
