What is the Repo Rate and How Does it Impact Homebuyers?

The repo rate has a major influence on the financial world, especially on the housing market. This is because it directly affects the interest rates of home loans. This impacts a homebuyer’s ability to afford loans and meet their current financial loan commitments. Potential homebuyers must understand the concept of repo rate and its effects. This can help them make informed decisions about when to apply for a loan and the possible influence of repo rate on their repayment abilities.

Brief on Repo Rates

The interest rate at which the Reserve Bank of India (RBI) lends capital to commercial banks is known as the repurchase rate or repo rate. Whenever a bank needs funds, it borrows capital from the RBI at the current repo rate. Depending upon the economic conditions, the RBI periodically revises the repo rate as it is important for controlling inflation and managing liquidity. However, the rise or fall in the repo rate changes the cost of borrowing for the banks, therefore increasing or decreasing the interest rate at which the bank offers loans to homebuyers.

Effect of Repo Rate on Home Loans

Understanding the repo rate effect on home loans is important since it has a direct effect on home loan interest rates. 

• When RBI increases the repo rate, the cost of acquiring capital for banks increases. To maintain the potential profit margins, banks increase their lending rates resulting in increased interest rates. Individuals who have floating interest rates thus have to increase their monthly EMIs to meet the changed interest rates. On the other hand, the borrowing cost also increases for potential homebuyers.
• If RBI decreases the repo rate, borrowing becomes affordable for banks. Banks, in turn, transfer these benefits to existing and potential homeowners, allowing them to borrow at affordable rates.

Influence of Repo Rate on Homebuyers

Changes in repo rate affect various factors associated with purchasing a home. Repo rate impact on homebuyers is as follows.

Fixed vs Floating Interest Rates

Before purchasing a home, individuals have the option of choosing between fixed and floating interest rates. When borrowers choose a floating interest rate, their EMIs can change with changing repo rates. If they select fixed interest rates, their EMIs and interest rates remain unaffected by changing repo rates.

Affordable Home Loans

A decrease in the repo rate results in lower loan rates, making homeownership affordable. This is because as the home loan rate decreases, the cost of owning a home reduces and creates a greater demand in the housing market. On the other hand, if the repo rate increases, the demand reduces as the cost of borrowing cost increases.

Opportunity to Refinance Loans

Borrowers with floating interest rates may see changes in their monthly payment amount due to changes in repo rate. To avoid the extra costs, individuals can choose to refinance their loans when the repo rate drastically decreases. Borrowers can reduce the repayment burden by transferring their loan to a lender that offers lower interest rates.

Navigating Changing Repo Rates

Homebuyers can adopt the financial strategies given below to navigate through changing repo rates.

• Monitoring RBI Announcements and Transfering During Rate Drop: Keeping track of repo rates as per periodic announcements of RBI can be helpful for timing loan applications. Existing loan owners can transfer their loans to other banks offering affordable rates when the repo rates drop. This can help individuals save capital on interest payments.
• Choosing the Right Type of Loan and Considering Prepayment: Individuals can choose between a floating interest rate and a fixed interest rate. Floating interest rates are preferable during declining repo rates while fixed interest rates remain unchanged by varying repo rates. Individuals who have opted for floating interest rates may choose to make part payments to reduce the principal amount and lower the cost of the loan.

Conclusion

The repo rates have a significant impact on a homebuyer's ability to apply for a loan. Repo rate and real estate are directly related since the change in repo rate affects the interest rate of a home loan. RBI periodically reviews the repo rate and based on the economic condition, they increase or decrease the rate. As the repo rate increases, borrowing capital becomes costly for both, banks and home loan borrowers. On the other hand, taking a loan becomes affordable for banks and loan applicants as the repo rate decreases. Individuals can choose between fixed and floating interest rates while keeping in mind that the repo rate affects floating interest rates. Furthermore, individuals can reduce their loan obligations by refinancing their loans when the repo rates are lower.

FAQs on What is the Repo Rate and How Does it Impact Homebuyers

When does RBI change the repo rate?

The RBI reviews or changes the repo rate during its Monetary Policy Committee (MPC) meetings.

Does the repo rate affect fixed and floating interest rates?

The repo rate only affects the floating interest rate, as their interest rates change based on the market conditions.

What is the benefit of a lower repo rate for a homebuyer?

EMI become more affordable as a lower repo rate reduces the home loan interest rate.

What will happen if the repo rate increases after I take a home loan?

The increase in the repo rate will increase the interest rate and monthly EMI of your home loan only if your loan has a floating interest rate.

What should I choose, a floating interest rate or a fixed interest rate?

You can choose the type of interest rate that suits your budget. However, if the repo rates are expected to decrease, individuals may choose floating interest rates.