Know How the Repo Rate is Linked with your Home Loan

If you remain updated with housing loan rates and their changes, you must have come across the term ‘repo rate’. It is crucial to understand this rate to better understand how it impacts your home loan interest rates.

Repo rate is the rate at which the central bank of India, the RBI, lends funding to financial institutions across the country. It is a key component determining the lending rate at which you borrow a loan or an advance. 

It is because any change in the repo rate makes financing costlier for lending institutions, which they thereon transfer to their customers, a.k.a, the retail borrowers. The current repo rate after subsequent deductions stands at 4%, which is one of the lowest in the history of the Indian economy.

To better understand this link, here’s an explanation. Under the floating rate system, the interest rates on loans are tied to a base rate determined from time to time as per changes in the monetary policy. The latest changes specify such base rate to be linked to an external benchmark for transparency in rate levy system and easy passing on of such benchmark rate changes to the retail borrowers. 

In the current scenario, the repo rate is taken as an external benchmark, which directly links your home loan rates, thus impacting them with every change. When initiating the home loan process, make sure to confirm with your lender whether they are following this latest rate linking system or not for improved affordability.

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