RBI hikes REPO Rate: Home Loans to Cost More!

RBI has hit the headlines again as it increases the existing REPO rates.

As the world is set to face the harsh recession imminent in the next year. Many of the major industrial and business tycoons have already started massive layoffs to cope with the same and survive.

RBI has always used the REPO rates to control the influx of money during major economic shifts and crises. Based on economic conditions, RBI regulates the REPO rate; thus, to combat the present and upcoming Inflation, the RBI has increased the REPO rates to 6.25 percent.

REPO rate is now 6.25 percent, as RBI increases it up by 35 bps, which is the highest since February 2019.

But for our readers who are not aware of REPO rates,

Let me elaborate.

What is REPO Rate?

Every commercial bank in India can borrow money from the Central Bank of India, RBI. In compensation, those banks have to pay back the loan money with an additional interest rate. The interest rate that the commercial bank pays to RBI is the REPO rate.

That rate of interest, or the REPO rate, can vary from time to time, according to the country's economic stability.

What does it mean for the Common Man & Real Estate?

In simple words, Home loans will be expensive, whereas deposits might fetch more interest rates. Home Loans EMIs might cost 23% more for the borrowers than in April. This certainly will affect both floating and fixed borrowers.

Banks like Indian Overseas Bank, Bank of India, and Bank of Baroda have raised their lending interest in response to RBI's move.

Many economists are of the opinion that Inflation can be tackled and eased with this move. REPO rates directly affect the lives of ordinary people by raising overall interest rates. As was previously mentioned, the REPO rate is the interest rate that the RBI levies on money lent to commercial banks.

When the REPO rate rises, commercial banks' borrowing costs and the interest rate at which they borrow money from the central bank. Commercial banks then raise lending rates to keep up with the REPO rate increase. Therefore, the effective interest rate increases when regular people borrow money from commercial banks and end up paying higher interest rates for their loans. As a result, home loan interest rates will rise for both new and existing borrowers based on tenure.

The higher the remaining tenure, the higher would be the percentage hike in your EMI due to the cumulative rate increase of 2.25% since May 2022.

Existing Home Loan borrowers can extend their tenure, but many cannot, as the typical age limit (is around 60-65 years). And an EMI extension might increase an overall payable amount as well. But the borrowers who had opted for shorter tenures can raise the said period to tackle the EMI rate. In such cases, or if your savings are lesser than the said EMI rates, you can opt to partially pre-pay your home loan.

What happens to EMI if repo rate increases?

The increase in repo rates has the most negative impact on borrowers. Due to the recent repo rate increase, existing borrowers who have taken out loans with variable interest rates, such as house loans, would experience an increase in their monthly payments.

How much will EMI increase after repo rate?

Now, if the same rate increases by 35 basis points (0.35%), the entire interest rate on which the bank levies would climb to 8.75% from 8.4 % previously. As a result of this increase, the customer's EMI may reach around Rs 884 per lakh, according to the calculator.

Example of repo rate?

For instance, suppose a borrower took out a house loan for Rs. 20 lakh with a 20-year repayment term and an interest rate of 8.50 percent. He is now making an EMI payment of Rs 17,356. However, the new interest rate will climb to 8.85% with a 0.35 percent increase following the repo rate hike, bringing the EMI to Rs 17,802.