How Does Repo Rate Affect Home Loan Interest Rates?

How Does Repo Rate Affect Home Loan Interest Rates?

The Repo Rate is the interest rate at which the Reserve Bank of India (RBI) lends money to banks. When RBI changes this rate, it affects how much banks charge people for loans, including home loans.

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Latest Update: RBI Reduces Repo Rate to 6.25%

The RBI has recently cut the Repo Rate to 6.25%, making loans cheaper for banks. This means that home loan interest rates are also likely to decrease, reducing EMIs for borrowers. If you are planning to take a home loan, this could be a great time to do so!

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What is Repo Rate?

The Repo Rate is the rate at which RBI gives money to banks when they need extra cash. If this rate goes down, banks get money cheaper and can charge lower interest on home loans. If this rate goes up, borrowing becomes expensive, and home loans cost more.

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How Does Repo Rate Affect Home Loans?

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What Happens?	What Banks Do?	Effect on Home Loans?
RBI lowers Repo Rate	Banks get money at a lower cost	Home loan rates go down, EMIs become cheaper
RBI increases Repo Rate	Banks pay more for funds	Home loan rates go up, EMIs become expensive

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How It Works Step by Step

1. RBI Changes the Repo Rate

• If RBI lowers the Repo Rate, banks get cheaper money.
• If RBI raises the Repo Rate, banks have to pay more.

2. Banks Adjust Home Loan Rates

• When banks get cheaper money, they reduce home loan interest rates.
• If banks pay more for money, they increase home loan rates.

3. Home Loan Borrowers Feel the Change

There are two types of home loan borrowers:

A. People with Repo-Linked Loans

• Their home loan rate changes quickly when RBI changes Repo Rate.
• If Repo Rate goes down, their EMI becomes lower.
• If Repo Rate goes up, their EMI becomes higher.

B. People with MCLR-Linked Loans

• Their loan rates take time to change.
• When Repo Rate falls, MCLR falls slowly.
• EMI reduction happens after some delay.

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Example: How a Repo Rate Cut Saves Money

Let’s say you took a ₹50 lakh home loan for 20 years at 9.0% interest.

If RBI lowers the Repo Rate by 0.50% (50 basis points), your home loan rate drops to 8.5%.

Interest Rate	Monthly EMI	Total Interest Paid
Before (9.0%)	₹44,986	₹57.96 lakh
After (8.5%)	₹43,391	₹54.13 lakh
Total Savings	₹1,595 per month	₹3.82 lakh over 20 years

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Key Takeaways

• Lower Repo Rate → Cheaper Home Loans → EMIs go down, houses become more affordable.
• Higher Repo Rate → Costlier Home Loans → EMIs go up, buying a house becomes expensive.
• Repo-Linked Loans Change Faster → Borrowers with repo-linked loans feel the change quickly.
• MCLR Loans Take Time to Change → The impact is slow but happens over time.

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