Does Repo Rate Affect Your Home Loan Installment

Home loan interest rates were slashed soon after the Reserve Bank of India announced a repo rate cut in 2020. The decision has helped the borrowers to obtain funds at low interest rates, which inevitably made their home loan EMIs affordable. Even though such changes directly impact borrowers, most of them are not aware of its significance and how it works.

Repo rate basically signifies the interest rate at which the Reserve Bank of India lends money to commercial financial institutions whenever these face a shortage of funds. In the case of repo rate cuts, the cost of borrowing for these financial institutions automatically goes down and benefits the borrowers.

However, all the home loan eligibility parameters play significant roles here, especially having a CIBIL score over 750–800 is required to obtain funds at reduced interest rates.

Here are some other relevant aspects of repo rate that influence home loans:

• Even though home loan EMIs eventually lower after repo rate cuts, the benefits cannot be obtained immediately. Financial institutions have to lower the base lending rate once the repo cuts get announced, and that is when the monthly installments start falling too.
• Borrowers who have availed home loans with fixed interest rates are not able to get such facilities due to the fixed nature of this particular interest type.
• In most cases, lending institutions reduce the loan tenor instead of home loan interest rates after the rate cut. Therefore, those who have chosen a long repayment tenor can mainly see the difference in their loan EMI.

However, borrowers can also contact their lender to reduce their monthly instalments and reset the terms and conditions. They also need to submit a new ECS mandate in this regard.

Such a reduction in rates can also limit home loan EMI, making them more affordable. Inversely, when the economy is booming, the RBI can decide to increase repo rates, causing a hike in housing loan rates.