If you’re a home loan borrower or planning to get one, understanding the repo rate is essential. The repo rate has a direct impact on your EMIs (Equated Monthly Installments) and overall loan repayment. Let’s know what is Repo Rate and how it impact your home loan payments.

---

What is the Repo Rate?

The repo rate (short for “repurchase rate”) is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks when they need short-term funds. It’s a key tool used by the central bank to manage inflation and economic stability.

• Higher Repo Rate: Makes borrowing costlier for banks, reducing the money supply to control inflation.
• Lower Repo Rate: Makes borrowing cheaper, encouraging spending and investment.

---

Why Does the Repo Rate Matter for Home Loans?

The repo rate directly affects the interest rates on home loans offered by banks. Here’s how:

1. Transmission of Rate Changes
   Banks often link home loan rates to the repo rate or similar benchmarks. Any change in the repo rate influences loan interest rates.
   • Rate Increase: Higher repo rates lead to higher loan interest rates.
   • Rate Decrease: Lower repo rates result in reduced loan interest rates.
2. Type of Interest Rate
   • Fixed Interest Rate: Your EMI remains the same, unaffected by repo rate changes.
   • Floating Interest Rate: Your EMI fluctuates based on repo rate movements, directly impacting your repayments.

---

How Does the Repo Rate Impact Your Home Loan EMIs?

• When the Repo Rate Increases
  Banks may raise home loan interest rates, causing an increase in EMIs for floating-rate borrowers.
  Example: A ₹30 lakh loan at 7% interest over 20 years could see EMIs rise significantly if the rate increases to 7.5%.
• When the Repo Rate Decreases
  Banks often reduce interest rates, leading to lower EMIs for floating-rate borrowers.
  Example: If the rate drops from 7% to 6.5%, borrowers may enjoy reduced monthly payments, easing financial pressure.

Must Know: Use Home Loan EMI Calculator before taking home loan!

---

Factors Influencing the Repo Rate’s Impact on EMIs

1. Loan Amount and Tenure
   Larger loans and longer tenures experience greater EMI changes with repo rate shifts.
2. Interest Rate Benchmark
   If your loan is tied to the repo rate, changes reflect directly on your EMIs. Loans linked to benchmarks like MCLR may have delayed or lesser impacts.
3. Interest Rate Reset Period
   Floating-rate loans reset periodically (every 6 months). The timing of these resets determines when changes affect your EMIs.

---

Managing Repo Rate Changes

To minimize the impact of repo rate fluctuations on your home loan:

• Opt for Fixed-Rate Loans
  If stability is a priority, consider a fixed-rate loan, though it may initially have higher rates.
• Refinance Your Loan
  Explore refinancing options if rates rise and better terms are available elsewhere.
• Make Prepayments
  Use bonuses or savings to prepay part of your loan, reducing the principal and overall interest burden.

---

Conclusion

Understanding the repo rate helps you stay prepared for EMI changes and manage your finances better. Whether the rate goes up or down, being proactive with your loan strategy—such as refinancing or prepayments—can help you save money in the long run. Stay informed about repo rate updates and their impact to make smarter financial decisions.