The Reserve Bank of India was formed with the sole intention of helping the country build a stable financial system. One of the key functions of the Reserve Bank of India is that it helps maintain a stable economy as well as keep inflation under control. The RBI does so with the help of the Repo Rate. The Repo Rate is the rate at which the Reserve Bank of India lends money to lenders within the country. The lenders add a base rate to this repo rate and this becomes the interest rate that the lenders charge a borrower. The interest rate that lenders charge from a borrower is therefore directly dependent on the repo rate – when the RBI increases the repo rate, home loan interest rates and EMIs increase. On the other hand, when the RBI reduces the repo rate, home loans become cheaper. Let us look at how interest rates affect home loans. 

Cost of Borrowing the Loan

As mentioned before when the Reserve Bank of India decreases the repo rate, home loans become cheaper since lenders also sanction loans at a lower rate of interest. Since home loans are big-ticket and long-term loans, even a decimal point reduction in the repo rate can help one save a lot of money in the long term. For instance, when a borrower avails of a Rs.25 Lakh loan for 20 years at 8.5% interest, the total interest pay-out is Rs.27,06,939. However, when the borrower avails of the same loan amount for 20 years at 8.3% interest, the total interest pay-out comes down to Rs.25,18,640. Thus, when the current home loan interest rates go down, the cost of borrowing the loan goes down too. 

Your EMIs Become More Affordable 

When the home loan interest rates go down, your EMIs will get affected if you are on floating interest rates. Lenders offer home loans on two types of interest rates: fixed and floating interest rates. The interest charged in the case of fixed-rate home loans does not depend on external market conditions and stays the same through the tenor of the loan. On the other hand, the interest rates are tied to external market conditions in the case of floating interest rate loans. 

If you are on floating interest rates, your EMIs will become higher if the home loan interest rates increase and by that same logic, they will also become lower if the home loan interest rates go down. So, for instance, if you have availed of a Rs.50 Lakh home loan at 8.5% interest for a 25-year repayment tenor, your EMI would be Rs.40,261. If the interest rate goes up by .5%, your EMIs would become Rs.41,960 and if the interest rate goes down and you are on a floating rate of interest, your EMIs would come down to Rs.35,591.

Sometimes, borrowers are quick to pass on the effects of a home loan interest rate hike to borrowers. However, when the interest rates go down, they do not pass on the benefits to the borrowers. In this case, borrowers can apply for a home loan balance transfer. A home loan balance transfer is a facility offered by most lenders these days using which borrowers can transfer their home loan to another lender offering better loan terms and conditions, such as lower interest rates, beneficial loan terms and conditions, etc. Further, borrowers who are on a floating rate of interest can transfer their home loan without paying any fee or penalty – this is RBI’s mandate. So, use this facility to your best advantage if your current lender is refusing to pass on the benefits of a repo rate cut to you.

Also Read: Why does interest rate play an important role in home loans?