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Home Articles Repo Rate Unchanged: Home Loan Rates Go Up?

Repo Rate Unchanged: Home Loan Rates Go Up?

IndianMoney.com Research Team | Posted On Monday, October 08,2018, 03:08 PM

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Repo Rate Unchanged: Home Loan Rates Go Up?

 

 

The Reserve Bank of India (RBI) kept the repo rate unchanged in its bi-monthly policy review meet on October 5th 2018. This was after the RBI had opted for back-to-back repo rate hikes in the last two bi-monthly policy review meets. RBI repo rate increased from 6% to 6.5%. Many analysts expected a repo rate hike of at least 25 bps, as crude oil prices were high and inflation needed to be combated, but the RBI did not oblige.

Why RBI did not hike repo rate? The RBI has decided to go for a calibrated tightening of rates instead of neutral. This means no more rate cuts. The RBI has decided to go for a repo rate hike in a staggered manner. This means there will be rate hikes, but not at every bi-monthly policy review meet.

What could be the reasons for the RBI not going for a repo rate hike? The RBI would be looking to strengthen domestic macroeconomic fundamentals because of global factors like trade war between US and China and the high International Crude Oil prices. This shows RBI is serious in controlling inflation. However some analysts have a counterview. They believe that the RBI has not hiked the repo because of softening food prices (food prices are going down keeping inflation low). They say this is a mistake as the depreciating currency (Rupee vs Dollar is nearly 74) and this means inflation will go up anyway. This means the RBI may be forced to hike the RBI repo rate by 50 bps in the December bi-monthly policy review meet.

If the RBI repo rate is unchanged does it mean your home loan rates will not go up? Let’s find out. Want to know more on home loans? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

Repo Rate Unchanged: Home Loan Rates Go Up?

Take a look at this data. SBI has raised MCLR by 5 basis points which will be effective from October 1st 2018. SBI had already hiked MCLR by 20 basis points in September and this is the fourth interest rate hike in the year. HDFC a leading NBFC, had raised the prime lending rate (PLR) by 10 bps just two days before the RBI bi-monthly policy review meet. MCLR (It is the minimum interest rate that a bank can charge on Home Loans. Banks add a small percentage of spread to the MCLR and the resultant figure is the rate of interest charged on Home Loans). Prime lending rate (PLR) is the interest rate banks charge to most credit worthy customers.

What is Repo Rate?

Repo rate is the rate at which RBI lends to commercial banks, if there is a shortfall of funds. The repo rate currently stands at 6.5%. If banks are short of money they approach the RBI for financial assistance. The RBI lends money to commercial banks during a financial crisis. Commercial banks borrow money from RBI by pledging securities or bonds and agree to repurchase them at a predetermined price at a future fixed date. The rate of interest charged by RBI is the repo rate.

Let’s understand this with an example. The repo rate is 6.5%. A commercial bank has borrowed Rs 1 Lakh from the RBI. The bank must pay Rs 6,500 in interest.

What is Bank Rate?

RBI extends loans to commercial banks at a rate called the bank rate. Banks do not have to pledge securities or bonds for this facility.  Banks borrow money from the RBI and lend to customers at a higher rate to make a profit. If RBI hikes the bank rate, banks would borrow at higher rates, increasing the loan burden on customers. Bank rate is higher than RBI repo rate. If banks increase the bank rates, this restricts people vis-à-vis loans, and the economy suffers.

See Also: Home Equity Loan: Benefits, Working Process and Calculation

Banks Raise Home Loan EMIs

Most major banks including SBI have already raised MCLR rates effective October 1st. SBI offers home loans ranging from 8.7-8.85%. ICICI Bank raised MCLR by 0.1% and offers home loans ranging from 8.9-9%. HDFC offers home loan rates varying from 8.8-9.05% on various slabs of loans. Most banks revise MCLR at the beginning of each month. This means home loan EMIs will go up.

What Should Home Loan Borrowers Do?

1. First Time Home Loan Borrowers:

Are you a new home loan borrower? Planning to avail a home loan for the first time? Do not wait any longer. Banks have been hiking MCLR since the beginning of the year and home loan EMIs will go up.

Do look at PMAY or the Pradhan Mantri Awas Yojana. This is a credit linked subsidy scheme (CLSS) under Housing For All by 2022. If you are eligible for PMAY, do apply before March 31st 2019 as it expires on this day.

2. Existing Home Loan Borrower with Loans Linked to MCLR

Are you an existing borrower with home loan rate linked to MCLR? You will find home loan EMIs going up when the reset date of home loan arrives. You continue to pay existing home loan EMIs till the next reset date arrives. When the reset date arrives, all future home loan EMIs will be calculated based on interest rate applicable on reset date.

In a 6-month reset home loan, if you avail a home loan on June 2018, and the RBI raises repo rate in August, even if the bank MCLR is hiked in this month, effects are seen only in December 2018. Home loan EMIs will go up only in December 2018.

If you are an existing home loan borrower, check home loan interest rates at other banks. If there are substantial savings, opt for home loan balance transfer, otherwise continue with the existing bank.

3. Existing Borrower with Loans Linked to Base Rate

If you are an existing home loan borrower whose home loan is linked to base rate, consider a switch to MCLR. If you have sizeable home loan tenure left, switch to MCLR. MCLR is highly transparent and offers better transmission of policy rates vis-à-vis base rate. A Reset date means lesser volatility vis-à-vis home loan interest rates.

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