Even as the real estate sector and home loan borrowers reel under the surprise of multiple repo rate hikes in recent months; the Reserve Bank of India, in its monetary policy meeting on 30th September 2022, decided to increase the repo rate again by 50 basis points. This is the fourth repo rate surge in the last five months, which began from 4th May this year. These hikes were undertaken to stabilise the macro-economic conditions amid increasing volatility in the financial markets. The current repo rate in India now stands at 5.90%.
What Is the Repo Rate?
The RBI employs several direct and indirect instruments for implementing monetary policies, one of these being the repo rate. It defines repo rate as the fixed interest rate at which overnight liquidity is provided to lenders against the collateral of government and other approved securities under the Liquid Adjustment Facility (LAF).
This means, when lenders have short-term requirements for finances, they can deposit their government securities and other approved holdings with the RBI, and borrow money against them at the current repo rate. Since this is the rate of interest that the RBI charges for lending funds, it serves as a key benchmark for loan pricing that eventually extends to home loan borrowers.
Repo Rate: A Pivotal Monetary Tool
The RBI purchases securities from lenders at a discounted rate known as the repo rate, short for ‘Repurchasing Option’. This system allows the apex bank to control the money supply within the economy by increasing or decreasing the availability of funds.
For instance, when the RBI wants to release more cash in the economy, it decreases the repo rate. This leads lenders to sell their securities to generate more capital for lending and issuing credit, elevating money flow into the market. They may also lower the interest rates offered on home loans, thereby extending the benefits of the rate cuts to their customers, who are then encouraged to borrow more for their business and investment opportunities. Consequently, a surge in cash flow within the economy augments financial growth and development.
In contrast, when the repo rate is raised, lenders are normally hesitant to borrow funds from the RBI. This limits their financial ability to offer loans and other forms of credit. A hike in repo rates spills over to their own interest rates, which causes a spike in the cost of borrowing, slowing down credit. These factors restrict the movement and supply of money in the market, thus, applying the brakes on rising inflation.
Repo RateImplications of the RBI’s Recent Repo Rate Hike
Existing borrowers on a floating interest rate loan may feel the impact sooner as they see a rise in their EMIs. Nevertheless, lenders are likely to pass on the latest rate surge to their new borrowers, whether servicing fixed or floating rate loans. They may have to bear larger EMIs rendering home loans an expensive proposition.
Housing loans extend for several years and there are bound to be market fluctuations during this period. But if lenders do not lower their ‘Base Lending’ rate correspondingly, your EMIs may not reduce despite a fall in the repo rates.
The RBI makes use of several other tRepo Rateools to regulate the economy apart from the repo rate. These include reverse repo rate, Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), all of which could in some measure, affect your home loan interest rates and the applicable terms. Most lenders have already implemented the rate hike for borrowers with External Benchmark-Linked Rate (EBR) loans.
Other borrowers who have loans linked to older rate regimes, such as Marginal Cost of Funds-Based Lending Rate (MCLR), base rate or Benchmark Prime Lending Rate (BPLR), could see their interest rates soar in the near future.
Keeping in mind the present scenario, here are a few things that housing loan borrowers should remember to contain the impact of increased interest rates:
Avoid Loan Tenor Extension
Whenever interest rates go up, lenders prefer to increase the tenor of a home loan instead of the EMI. This enables borrowers to continue paying the same instalment amount without upsetting their monthly budget. However, an extension in tenor raises the payable interest adding to the loan cost. One can bring down this cost by keeping the loan tenor intact if you can pay higher EMIs.
At the same time, if affordability is an issue, a rise in EMIs may not be a feasible idea and one should explore tenor extension. So, if you have a loan tenor of 15 to 20 years, you can stretch it further. Whereas, if you have a loan tenor of 25 to 30 years, the scope for a longer tenor is limited.
Another factor that may determine tenor extension is your retirement age. When the borrower is a long way off from retirement, the lender can increase the loan tenor. Otherwise, in case of a borrower nearing retirement, lenders may find it difficult to grant a longer tenor.
Consider Partial Pre-Payments
If you have surplus funds available from time to time in the form of bonuses, salary raise or matured investments; you can utilise them to prepay the loan, partially or fully, and control the EMI outgo. Moreover, foreclosing your home loan earlier than the scheduled tenor helps you save considerably on the interest component.
