Taking a loan to fund your purchase of a home is one of life’s major decisions. It affects your present and future financial state, and can have both long- and short-term impact on almost every area of your life. It is an investment that involves a long-term commitment, and though you have a significant achievement to show at the end, it is still a burden that merits serious consideration, analysis and forethought. This is a big value transaction and once you embark on this journey, it’s not easy to abandon it or turn back.
There are hundreds of very attractive options available, with banks and housing finance companies offering a variety of choices to suit your unique requirements. Choosing the best possible home loan is every borrower’s goal.
It’s wise to keep a few points in mind:
- Tenure: In general, the time period of the loan could extend anywhere between 5-30 years
- Age: The younger your age, the longer you have to repay the loan, and you can do it in a more relaxed way
- Income: Calculate your FOIR (Fixed Obligation to Income Ratio) and strike the right balance between your income and your repayment obligations
- Amount: If you have some savings, you can make a larger down payment and avail of the rest of the cost in a home loan. This can reduce the EMIs and the tenure
- Interest rates: One of the factors that has to be kept sight of is the prevailing climate of interest rate across the banking and non-banking sectors.
What Is Repo Rate?
A crucial aspect of the loan structure and scenario is the repo rate. This plays a major role in calculation of EMI and interest rates that come with the loan. You may have heard this term used often in financial news. It is one of the most powerful instruments in the country’s economic policy, and is used to control the rate of inflation, liquidity and money supply.
Banks have to carry enough funds to lend and invest. Money from depositors may not be enough to cover this. They may be short of funds or liquidity because of volatility in the market. As a result, they in turn borrow from the country’s central bank. In India, this is the Reserve Bank of India (RBI). The RBI lends money at a particular rate that it determines periodically.
This is known as “Repo” (repossession option or repurchase agreement). Banks provide securities or collateral to avail of loans from the Reserve Bank. When they wish to repurchase these securities, the Reserve Bank sets a particular price and date for this. This price or rate is a way for the central bank to manage inflation in the country’s economy. Higher repo rates mean less liquidity in the economy, but banks will find it more expensive to borrow, and vice versa.
The RBI can also borrow from banks, and the interest rates charged are known as reverse repo rate.
How Does Repo Rate Impact Your Home Loan?
The repo rate is tied to the current home loan interest rates that banks charge when they lend money for loans.
EMI: Repo rate has a major impact on lending rates for home loans. When it is increased, the EMIs get raised automatically along with the repo rate. When repo rates decrease, banks can charge a lower rate of interest to home loan borrowers.
Lower repo rates mean that your bank or housing finance company can offer you a lower rate of interest, and your EMIs will be consequently lower.
Higher repo rates translate to a steeper interest that your bank or housing finance company has to pay the Reserve Bank. This load is passed on to the borrower, that is you. In a high repo rate climate, your home loan EMIs will be much higher.
You can use the handy EMI Calculator that’s available on the bank website to determine your home loan interest rates.
Term: The tenure of your home loan may increase with a higher repo rate. This is because you will need more time to repay the loan because of the higher interest rates. When the repo rate comes down, the tenure will also reduce in parallel.
Eligibility: Your eligibility to avail of a loan can be affected by the repo rate. This is because low repo rates bring more borrowers into the arena and the EMI becomes lower. You can also avail of higher loan amounts. The opposite happens when repo rates are higher.
Foreclosure and Pre-payment: When the repo rates increase, the bank could raise the prepayment and foreclosure charges. In the opposite case, lower repo rates mean lower prepayment and foreclosure charges imposed by your bank or housing finance company.
Currently, the RBI has held the repo rates steady over consecutive cycles. The repo rate is also affected by the global economic scenario, wars, conflicts, low economic growth, recession and many other external factors. Internal factors include inflation, supply and demand, government policies, loan period and credit risk.