The Reserve Bank of India has decided to sustain the repo rate at the existing 6.5%. The real estate sector has welcomed the decision and felt that it would benefit home buyers. What would be the impact of the repo rate on home loans? What would be the net effect if the repo rate continued at the existing level?
The banks are likely to follow the policy of the central bank if the RBI does not effect changes in the repo rate as per its fiscal policy. But commercial banks and home loan companies are unlikely to extend loans according to the repo rate. The banks will collect a higher rate of interest than the repo rate, which serves as the benchmark for banks to extend home loans.
If a bank extends a home loan of Rs 50 lakh to an individual for 10 years at a 6.5 rate of interest, it would collect Rs 18,12,879 towards interest on the principal. The monthly EMI works out to be around Rs 56,774. If the repo rate were to be increased by 0.25%, the interest to be collected by banks would go up by Rs 76,568, pushing up the EMI to Rs 57,412.05. A small increment of 0.25% in the repo rate by the RBI would increase the home loan by 204%.
As the RBI decided to keep the repo rate as it was before the LS elections, the real estate sector received a big relief. As there was no increment in the repo rate, there was no increment in the EMIs.
