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Repo Rate Hike : How will YOU get Impacted and What should YOU Do | How the Repo Rate Influences the Home Loan Rates | What Is Repo Rate | How Does Repo Rate Impact You | What Can You Do | 2YODOINDIA

Repo Rate Hike : How will YOU get Impacted and What should YOU Do?

As RBI increase the repo rate, the rate at which the central bank of the country lends funds to the commercial banks by 50 basis points (bps) to 5.40% in its bi-monthly policy meeting.

The decision is going to impact a large number of home loan borrowers and impact the prospective borrowers who are planning to buy a new house.

What Is Repo Rate?

A Repo Rate is a rate at which the RBI lends money to the banks.

If the Repo Rate increases, that means the commercial banks borrow money at a higher cost from the central bank, and they lend it at a higher cost too.

The recent rise in Repo Rate has signal that the cheaper home loans are now history, and both existing and new borrowers will now have to pay more interest to their lenders.

How the Repo Rate Influences the Home Loan Rates?

Every time a home loan is taken, the first thing that comes to mind is the interest rate.

It is one big factor that can influence a financial decision significantly.

Buying your home is one of the biggest financial decisions as it involves the transaction of a large amount of money.

As last years has a golden period for borrowers who got home loans at the lowest interest rate historically.

So, the time seems to be changing now owing to rising inflation levels after the Covid-19 pandemic lockdown and a geopolitical situation like the Russia-Ukraine conflict.

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How Does Repo Rate Impact You?

When you take a home loan at a floating rate, you borrow at the current market rate with the condition that you are liable to repay your loans as per the current market rate.

As most home loans are now link to the repo rate-base lending rate, whenever repo rates go up, your floating rate home loans will become costly, and there will be a sequential rise in the EMIs.

The RBI has increase the repo rate for the third straight time by 50 bps to 5.40%.

The total hike so far in 2022 stands at 140 bps, which withdraws the total cut of 115 bps passed in 2020.

These hikes will gradually play their part in controlling the high liquidity pump into the market in 2020.

It will also help in taming inflation, which has remaine above the RBI’s upper tolerance level for many months now.

As of now borrowers on floating rate loans would see their loan tenors increase with this hike.

One of the methods you can use to evaluate your loan rate is by checking the premium you are paying above the repo rate.

If you are a prime borrower (credit score over 750, stable income, loan payments on time), you can get home loan offers at a premium of around 250-275 basis points over the repo rate.

The premium varies from lender to lender.

Therefore, the range could be lower or higher depending on who you are and whom you are borrowing from.

What Can You Do?

It is advisable to prepay your home loan either fully or partially regularly.

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If you pre-pay 5% yearly, you can significantly reduce an increase interest rate burden.

Existing borrowers can refinance to a lower interest rate or increase their EMIs to avoid paying more interest on their existing loans.

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