To better predict the outcome of what borrowing with respect to home loans looks like, it’s useful to consider the repo rate. Home loans arelinked with the repo rates of banks, a move made by the Reserve Bank of India. But what is ‘repo rate’? It signifies the interest rate at which the Reserve Bank of India will lend money to different banks that will, in turn, satisfy customers. Fluctuation in the repo rate is carried out with the goal of controlling rising inflation in the country. If the RBI were to decrease the repo rate, more people would borrow from banks, making it highly beneficial for some.
The rise or fall in repo rate impacts both prior and new customers of home loans. When the repo rate drops, home loan interest rates also fall, making it much easier for customers to pay off these loans in the form of easy EMIs. As any home loan EMI calculator will show, the lower the home loan interest rates, the less expensive and long term its EMIs need to be paid for. Home loan eligibility might remain unchanged, but the same loans become attractive to many more factions when interest rates are friendlier. Home loan interest rates are constantly fluctuating, but what does the future hold for them?
The MPC — Monetary Policy Committee — of the RBI met on the 2nd, 3rd, and 4th of December 2020, where financial and current macroeconomic developments were reviewed and an unanimous vote was casted. This vote decided, among other things, whether the repo rate for the year would increase, decrease, or remain the same, thereby directly impacting home loans. As per its bi-monthly monetary policy review which was recently announced on the 4th of December, the repo rate will likely remain unchanged at a standard of 4%.
With respect to home loan, this vote suggests that home loan interest rates are likely to remain unchanged in 2021. The MPC also agreed to keep going with their current stance on monetary policy which has been accommodative in nature, provided they can mitigate the force of COVID-19 while reviving growth on a durable basis and keeping inflation within target. Hence, home loan interest rates are likely to continue at the level they are in 2021, with the Reverse Repo Rate standing at 3.35% and the Bank rate and MSF (Marginal Standing Facility) rate also remaining the same at 4.25%.
Home loan eligibility is impacted by things like one’s credit score, the amount borrowed, and income status. Hence, the unchanged repo rate will not make any meaningful impact on home loan eligibility criteria. However, as per the latest mandates by the RBI, any home loans taken next year or this year will remain the same in terms of EMI installments required since interest rates are not changing. Try your hand at a home loan EMI calculator to see for yourself.