Repo Rate Cut to 6.25% – How this will impact your Home Loan
The Reserve Bank of India uses the repo rate as a key monetary policy tool to control inflation and regulate liquidity in the economy. Any changes in repo rate, will directly impacts borrowing costs, especially for home loans.
What is the Repo Rate?
The repo rate is the interest rate at which the RBI lends money to commercial banks. A reduction in Repo Rate means banks can borrow money at a cheaper rate, while an increase in this makes borrowing money at higher rate from RBI.
How Repo Rate Impacts Your Home Loan
Floating Rate Loans
If you availed a home loan on a floating interest rate, a change in the repo rate affects your monthly installments. For example:
- Repo Rate Cut – Bank interest rates may fall – Lower EMIs or shorter tenure
- Repo Rate Hike – Bank interest rates may increase – Higher EMIs or extended tenure
Since most new home loans today are linked to the External Benchmark Lending Rate (EBLR), typically linked to the repo rate, the changes in interest rate are faster and more transparent.
Fixed Rate Loans
If your home loan is on a fixed interest rate, the repo rate has no immediate impact until your fixed term ends or you switch to a floating rate.
Is Refinancing the right step?
If repo rates drop significantly and your existing home loan is at a higher rate, refinancing or switching lenders might save you money. However, consider the processing fees, documentation costs, and remaining tenure before making the switch. Example:
- Let’s say you have a ₹50 lakh home loan for 20 years at a 9% interest rate:
- Your Monthly installment is = ₹44,986
- If the rate drops to 8%, your new EMI = ₹41,822
- That’s a monthly saving of ₹3,164 and total savings of over ₹7.5 lakh over the complete loan tenure!
A better understanding on how repo rate movements affect your home loan helps you make smart borrowing decisions. In a falling rate environment, you benefit from reduced EMIs. But in rising rate scenarios, planning ahead and reviewing your repayment strategy is key.
