- Date : 26/09/2022
- Read: 3 mins
Repo rate hike to affect homebuyers!
A Repo or a Repurchase Agreement is a short-term borrowing of assets in the form of government securities. A repo rate, in simpler words, is the rate at which the RBI lends funds to commercial banks. In August 2022, the RBI or the Reserved Bank of India, increased the repo rate to 5.40 percent by 50 basis points (bps). This decision came into force during the RBI’s bi-monthly policy meeting. The repo rate will directly influence the home loan rates and thus impact the people taking a home loan. Keep reading to find out how.
What are the implications of hike in repo rates, and what to expect at the 30 Sep meeting of the RBI?
The interest rate of a home loan is a very important factor while taking a home loan. This is because the interest rate greatly impacts the total amount. Thus, it can even change your mind regarding taking a home loan. It is not an unknown fact that buying a house requires a huge transaction. The ones who took a home loan in the last two years were quite lucky as they enjoyed the lowest interest rates. However, the post-Covid inflation calls for a much-needed change in the scenario.
The increase in the repo rate implies that commercial banks borrow money from the central bank at a higher rate. Consequently, they will also lend the money at a higher interest rate. The recent repo rate hike means that the period of low interest on home loans is over, and borrowers will now be required to pay much more as interest. Let us make it easier for you to grasp the concept. When you are taking a home loan at a floating rate, this automatically implies that the money lent to you is lent at the market rate, the prevailing conditions suitable for you to repay your loan. Most of the home loans these days are connected to the repo rate. Thus, a hike in the repo rate will also lead to a hike in your EMIs. This is how homebuyers will get impacted.
At the MPC meeting on 30th September, it is expected that the RBI will further hike the repo rates. This means that your existing EMIs will increase further. The expected hike is 50 bps. The Federal Reserve, in its September meeting, has delivered a 75 bps hike. The hike is expected to be 50 bps by the RBI. This means that the interest rate on your existing loans will increase by 50 bps if the RBI goes through with the hike.
Thus, even if you have been enjoying very low-interest rates over the last two years, you will now have to pay an increased EMI, all thanks to the repo rate hike. If you wish to evaluate your loan rates, you can check the premium you are to pay above the repo rate. The premium you have to pay above the repo rate depends upon your credit score, whether you pay loans on time, and the lender from whom you borrow the amount. Thus, if you have already taken a home loan, you can now either pay the full amount in one go or regularly pay in smaller amounts. Also, you should factor in the expected rate hike in September, along with the future rate hikes expected by the end of the year to contain inflation.