When availing a home loan, one of the most important factors to consider is the interest rate levied on the loan. Lower the interest rate, lower will be the overall cost of borrowing. This can reduce the repayment burden significantly in the long run. Various banks and other financial institutions provide loans at competitive interest rates. But there are certain factors that may affect the interest rate offered to you by the lender. One such factor is the repo rate, also known as the repurchase rate.
Let us have a quick look the details of the repo rate:
What is repo rate?
Commercial banks generate profits between arranging money and lending it forward to their customers. But banks also have to pay interest on savings and fixed deposit account to their customers. Therefore, at times to meet their monetary requirement, banks borrow from the Reserve Bank of India (RBI). The interest rate at which banks borrow money fromthe Reserve Bank of India(RBI) is called the repo rate or repurchase rate.
Importance of repo rate
- The repo rate plays an important role in controlling the availability of money in circulation. If the RBI reduces the repo rate, banks can borrow funds at a lower cost. This decreases the overall cost of funds and consequently, the interest rate for the customers is also reduced.
- According to the RBI new policies, the repo rate is reduced by 25 basis points for the third time in a row. Due to this, the repo rate now stands at 5.75%. RBI has decreased the repo rate in order to maintain inflation at the right levels and promote the economic growth of the country.
Effects of repo rate cut
- The repo rate reduction due to RBI monetary policies can provide a lot of benefits to the borrowers. Different loans product will be available at a comparatively lower rate of interest.
- Availing any type of loan at a reduced interest rate can decrease the overall cost of borrowing in the long run.
- It will also reduce the monthly installments and allow the borrowers to make timely repayment of the loan amount. This can also help them improve their credit score over a period of time.
- However, it is to be noted that the fixed interest rates do not change. Hence, it is advisable that borrowers should avail floating-rate loans to make the most of the repo rate cut.
- While the reduction in the repo rate is likely to benefit the borrowers, it is not beneficial for the investors. People who have invested in fixed-income securities such as fixed deposits may receive a low return on investments due to the rate cut.
This repo rate cut is likely to impact the real estate sectorifthe bankspass on the benefits to their customers by a corresponding reduction in interest rates. However, it has been observed that, despite the reduction in the repo rate, the interest rates on home loan have remained the same. Due to this, the benefits of the rate cut have not reached home buyers.
Though it is not mandatory for commercial banks to decrease the interest rates post RBI rate cut, RBI expects that banks to pass on the benefits of a decreased rate to their customers at the earliest. If this happens, home buyers will be able to avail home loans at a reduced rate of interest. This can help them save a large amount of money in the long run. While availing a home loan, it is advisable to settle for a lender that offers the most competitive interest rate. This will reduce the repayment burden, thereby allowing the borrowers to make timely repayment of their home loan.