How does the repo rate affect home loan EMI?

Repo rate is the interest rate charged by the Reserve Bank of India (RBI) from commercial banks when these banks borrow funds from RBI. When commercial banks need extra liquidity, they often turn to the central bank of India for borrowings.

The government also uses the repo rate as a tool to keep inflation under control. If it wants to check further inflation, the repo rate is increased, which discourages commercial bank borrowings. This, in turn, reduces the money in the hands of the common people. Similarly, by reducing the repo rate, the supply of money in the market can be increased.

Changes in the repo rate can also impact Equated Monthly Instalment (EMI). A decrease in the repo rate enables banks to offer home loans at a reduced rate of interest, which can lower the EMI amount. Thus, a change in the repo rate effectively leads to a change in the home loan interest rates.

However, what if the banks do not pass on the benefit of a reduced repo rate to the end-user? Or inversely, what if the bank increases the home loan interest rates substantially because of a small change in repo rate? This is where the Marginal Cost of Funds based Lending Rate (MCLR) comes into the picture.

MCLR is devised to ensure a closer correlation between repo rate changes and home loan EMI. Commercial banks are now required to disclose new interest rates every month and follow regulations on the extent of spread that they can apply on their base rate. The spread is decided on credit risk and tenor, which vary from one applicant to another. You can find that out while checking your home loan eligibility with your lender. With the introduction of MCLR, floating rate home loans often come with a reset clause attached to it. Commercial banks are not allowed to lend below the MCLR.

Effective October 1, 2019, commercial banks have been asked to link their home loan interest rates with one of the four external benchmarks, as directed in an RBI circular. Accordingly, the interest rate is now referred to as Repo Rate Linked Lending Rate (RLLR), which is the summation of repo rate and the margin charged by the bank.

With linking to an external benchmark, it is ensured that banks revise their interest rates within three months of any change in the external benchmark. Thus, home loan EMI remains interlinked with the RBI repo rate. This is also applicable when it comes to Tata Capital’s home loan interest rates.

An online home loan EMI calculator is the quickest way to find out your home loan EMI. You can do so with the Tata Capital home loan calculator. Tata Capital offers attractive interest rates that can make a significant difference in your EMI amount. So, reach out to them for a home loan today.

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