How Will Home Buyers Be Impacted If The RBI Holds Or Increases The Repo Rate

Homebuyers who keep a close watch on policy rates can’t be happier. The Reserve Bank of India (RBI) has brought the repo rate ― the rate at which the central bank lends money to banks ― to a record low of four per cent by implementing a 110-basis-points (bps) reduction since May 2020, in view of the coronavirus pandemic. If they remained apprehensive earlier about the real gains because banks tended to be slow or even unwilling to pass on the benefit, they have a reason to be confident now. Aside from the fact that since October 2019, all banks have linked their home loan rate with the repo rate, ensuring greater policy transmission, banks have also brought down home loan interest rate to sub-seven per cent currently. 

Also read: How Will Home Buyers Be Impacted If The RBI Holds Or Increases The Repo Rate

The RBI expects the rate reduction to bring the demand back in real estate, among other things. If that happens, the banking regulator might have to, at some point implement a hike in rates. What happens then? Should a buyer be worried about a possible rate hike in the future since all changes in policy rates would immediately reflect in his monthly EMI outgo if he has linked his home loan with the repo rate?

Under the previous regimes, banks recalculated a borrower’s loan amount only at specific intervals. This meant that even if the RBI reduced or increased rates multiple times, the move would not impact the borrower immediately.

“Borrowers need to keep in mind that repo-rate linked loans can work against them during the increasing interest rate regime. These loans will witness faster increase in their loan rates in the case of repo-rate increases by the RBI,” explains Paisabazaar.com chief executive officer and co-founder, Naveen Kukreja.

So, borrowers with limited risk appetite should consider sticking with old lending benchmarks where the transmission might be slower but so would be the possibility of sudden changes. Those switching to repo-rate linked home loans must also bear in mind that they would have to maintain a substantial sum in their loan accounts, just in case the RBI decides to hike rates and their EMI outgo increases. Lack of funds would result in EMI default, something that would reflect poorly on your credit history.

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