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Tata Capital > Blog > Loan for Home > How a Change in Repo Rate Impacts Your Home Loan EMIs

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How a Change in Repo Rate Impacts Your Home Loan EMIs

How a Change in Repo Rate Impacts Your Home Loan EMIs

Buying a house is one of the most significant financial decisions of your life. Hence, it is essential for you to be aware of its various aspects. Whether you want to buy a ready-to-move apartment or build a house from scratch, you would most likely be considering taking a home loan. 

Lenders offer several easy loans as long as you meet the home loan eligibility criteria. While the loans may seem identical at first glance, the real cost of your home loan depends on several factors like the amount of money you borrow and the loan tenure. 

However, the rate of interest the bank charges on your loan impacts your EMI most significantly. Have you ever wondered what determines the value of the home loan interest rates that you are charged by the lender that grants you the loan? 

The most critical factor that influences the rate of interest is the repo rate. Read on to understand the repo rate effect on home loan interest and EMIs.

What is repo rate? – Understanding the basics

Before diving into how it is linked to the monthly EMIs of your housing loan, here is a brief introduction to the RBI repo rate basics. In simple words, the repo rate meaning can be understood through its definition. The repo rate definition refers to the rate of interest at which the central bank, the Reserve Bank of India, lends money to commercial banks. 

In other words, what is repo rate? It is the cost at which financial institutions borrow money from the central bank by pledging government securities, with an agreement to repurchase them later.

Also, read – What is the Annual Value of House Property?

How does the repo rate affect your home loan EMIs?

The repo rate home loan EMI connection is direct, especially if your home loan is linked to an external benchmark such as the RBI repo rate. The effect of repo rate on loans comes into play whenever the RBI revises this rate. 

The repo rate is one of the RBI’s key tools for controlling liquidity and inflation in the economy. During a period of inflation, the Reserve Bank of India generally raises the repo rate. Borrowing becomes more expensive for financial institutions, which may lead to higher lending rates for customers. As a result, EMI changes repo rate hikes may mean higher monthly instalments or a longer loan tenure, depending on your lender’s policy.

Conversely, when the inflation rate falls or during a period of recession, borrowers often wonder what happens when repo rate decreases. In such cases, the Reserve Bank of India decreases the repo rate, which has a positive repo rate impact loans for borrowers.  It acts as an incentive for commercial banks to borrow more money. In turn, it makes more funds available to their customers with lower interest rates, which can translate into lower EMIs or a shorter repayment period for your home loan, thereby increasing the supply of money in the system. 

To fight the recession caused by COVID-19, the central bank has currently slashed its repo rate to an all-time low of 4.40%. 

Also, read – What are Conversion Charges for Home Loans?

What happens when the repo rate decreases?

However, it has been observed that when the Reserve Bank of India reduces its rates, what happens when repo rate decreases is that other banks take a while before decreasing the lending rates to customers. This delay makes the repo rate decrease effect less immediate for borrowers. On the other hand, banks are quick to raise their lending rates when the repo rates go up. Therefore, the RBI incorporated the Marginal Cost of Funds based Lending Rate regime in April 2016 to alter the way commercial banks function. 

The MCLR is an internal reference for commercial banks to decide the rate of interest they can charge on loans. As part of this regime, banks have to adjust their interest rates as soon as there is a change in the repo rate. This ensures that the lower repo rate impact is felt more quickly, allowing for a home loan EMI reduction when rates are cut. Overall, the repo rate cut effect not only benefits borrowers by making loans more affordable but also improves transparency in how lenders and financial institutions compute interest on advances.

Also, read – Monthly Reducing Balance Method

New repo rate effective date and what it means for borrowers

Every time the RBI has a new repo rate announcement, it is followed closely by borrowers and financial institutions alike. The repo rate effective date marks the point from which the revised rate starts influencing lending and borrowing costs. Knowing this date is crucial because it determines when the new interest rates on loans, including home loans, will come into effect.

The RBI’s repo rate change update signals financial institutions to adjust their lending rates accordingly. Most home loans in India are linked to either the RBI repo rate or the MCLR (Marginal Cost of Funds-based Lending Rate). This ensures that borrowers feel the repo rate borrowers impact promptly. For example, a rate reduction can lead to a home loan EMI reduction, while an increase may raise monthly payments.

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Floating vs fixed rate home loans under the Repo-Linked Lending Rate (RLLR)

When choosing a home loan, one of the key decisions borrowers face is whether to opt for a floating vs fixed loan. Under the Repo-Linked Lending Rate (RLLR) system, financial institutions link the interest rates of home loans directly to the RBI’s repo rate. An RLLR home loan automatically adjusts its interest rate whenever the repo rate changes, reflecting the repo-linked lending rate mechanism in real time.

In a floating rate loan, the interest rate fluctuates with market conditions or changes in the RLLR. This means your EMIs can increase or decrease over the loan tenure depending on repo rate movements. Conversely, a fixed-rate home loan has a predetermined interest rate that remains constant throughout the tenure, offering stability in EMIs but potentially missing out on the benefits of a repo rate cut.

Understanding the home loan interest types, floating and fixed, under the RLLR framework helps borrowers make informed decisions based on repo rate effect on home loan, risk appetite, financial planning, and expectations of future repo rate changes.

Tips for managing your home loan during repo rate changes

Changes in the repo rate can directly affect your home loan EMIs, especially if you have a floating or RLLR home loan. To manage home loan repo rate fluctuations effectively, borrowers need a proactive approach.

  1. Monitor repo rate announcements regularly: Stay updated on RBI policy changes and the new repo rate effective date. Being aware of repo rate loan tips, such as a rate cut or hike, allows you to anticipate changes in your EMIs.
  1. Reevaluate your EMI structure: With each change, assess whether you want to maintain the same EMI amount or adjust it. This is a key aspect of home loan interest management, helping you optimise repayment and potentially shorten your loan tenure.
  1. Consider prepayments strategically: During periods of lower repo rates, extra payments towards the principal can reduce total interest outgo, leveraging the EMI planning repo rate effect to your advantage.
  1. Consult your lender for rate reviews: Some lenders allow partial switches between floating and fixed rates or offer flexible repayment options. Understanding these choices can help you minimise the financial impact of repo rate volatility.

By following these strategies, borrowers can better manage home loan repo rate changes, keep EMIs predictable, and make informed financial decisions in response to RBI policy shifts.

Also, read – How to Apply for GPRA Accommodation via eSampada and eAwas

Why RBI uses repo rate to control inflation and economic growth

The RBI repo rate purpose goes beyond simply lending to commercial financial institutions. It is a key instrument of monetary policy that influences the overall economy. By adjusting the repo rate, the Reserve Bank of India can manage both inflation and economic growth.

When inflation rises, the RBI may increase the repo rate to make borrowing more expensive. This repo rate inflation control mechanism discourages excessive spending and borrowing, thereby reducing demand-pull inflation. On the other hand, lowering the repo rate reduces borrowing costs, encouraging spending and investment, which stimulates the economy. This shows the economic growth repo rate impact in action, as lower rates can drive consumption, business expansion, and job creation.

Through the RBI monetary policy repo rate framework, these adjustments provide a delicate balance between controlling inflation and supporting sustainable economic growth. By influencing the cost of credit, the RBI ensures that liquidity in the system is aligned with broader macroeconomic goals, making the repo rate a critical tool for maintaining financial stability in India.

Knowing the new repo rate effective date helps borrowers and businesses anticipate when these changes will impact loan rates, EMIs, and investment decisions.

Conclusion

Changes in the repo rate play a crucial role in determining how affordable your home loan is over time. Since the RBI uses the repo rate as a key monetary policy tool, any increase or decrease eventually influences home loan interest rates and EMIs, especially for loans linked to external benchmarks. Being aware of the new repo rate effective date helps borrowers understand when these changes will reflect in their EMIs. By staying informed and proactive, you can manage EMI fluctuations better and make well-timed financial decisions throughout your home loan journey.

For more queries about factors affecting home loan interest rates, visit the Tata Capital website.

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FAQs

How does a decrease in repo rate affect my home loan EMIs?

When what happens when repo rate decreases, your repo rate home loan interest may drop, reducing EMIs and easing repayment.

When is the new repo rate effective and when will it impact my loan?

 

The new repo rate effective date is when the RBI rate change starts, influencing your repo rate effect on home loan EMIs.

What is the difference between floating and fixed home loan interest rates?

 

Floating rates change with market rates or repo rate home loan movements, while fixed rates remain constant, providing EMI stability.

Can I switch from floating to fixed rate when repo rate changes?

 

Some financial institutions allow switching, but terms vary. Check your lender’s options before altering your repo rate home loan type.

How can I reduce my EMI when repo rate increases?

 

You can prepay part of your principal, extend tenure, or discuss rate revision with the financial institution to mitigate repo rate effect on home loan.

Does a repo rate cut guarantee instant decrease in loan EMIs?

 

Not always. Lenders may take time to adjust rates, so what happens when repo rate decreases might reflect gradually in your repo rate home loan.

How often do banks revise home loan interest rates according to repo?

 

Financial institutions linked to RLLR adjust rates typically monthly or quarterly based on the repo rate effect on home loan.

What should I do if I can’t afford the increased EMI after a repo hike?

 

Contact your lender for restructuring options, EMI rescheduling, or consider switching loan type to manage repo rate home loan impact.

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