As per the latest decision by the Monetary Policy Committee of the Reserve Bank of India, the repo rate is kept at 4% and the reverse repo rate at 3.35%. A repo rate is at which the Reserve Bank of India lends money to commercial lenders to help them during any shortage of funds.
Owing to the accommodative stance of India’s apex bank, the real estate sector has benefitted greatly as the interest rate on home loans reduced significantly.
Effect of repo rate on the real estate industry
Most experts have extolled the decision of keeping the repo rate intact as this status quo is likely to create demand in the real estate sector. Apart from it, as this ongoing health crisis is not as furious as before, the announcements of the RBI Governor to maintain this stance might positively impact this sector.
Many also believe that the current repo rate along with the budget announcements will assist this sector in managing its demands. Also, RBIs effort to ease the liquidity and lower interest rate might be the key to real estate recovery and can also help its remittance.
Apart from the positive impact on India’s real estate sector, a reduction of repo rate also benefits home loan borrowers of this country.
Effect of repo rate on home loan
As stated earlier that the current repo rate stands at 4%, which is the lowest since 2014. This, in turn, signifies that home loan borrowers seeking loans will get more affordable deals as the interest outgo will be considerably low.
However, prospective borrowers must note that their current home loan interest rate will take the repo rate and the margin from their preferred lender into consideration before announcing the final rate of interest. Moreover, it will also depend upon multiple factors such as LTV ratio, loan amount, and others.
Therefore, before applying for a home loan in India, one must take into consideration factors that affect housing loan interest rates to get a better understanding of their debt and how they can manage it.
Factors affecting home loan interest rate
A few factors that affect home loan interest are –
CIBIL score
Lenders often prefer applicants with a high CIBIL score. Usually, a score above 750 proves a candidate’s creditworthiness, and hence financiers might offer a lower interest for them. Additionally, applicants with a high credit score portray their previous disciplinary credit management, and thus, they become less risky borrowers for financial institutions.
LTV ratio
LTV ratio is the value of the concerned property that can be financed through a loan. Generally, leading financiers offer an LTV ratio of up to 90% in case of housing credit, and it plays a part in deciding the interest rate. Hence, the more amount a lender disburses, the higher will be the housing loan interest rate. So, experts advise making a considerable down payment to lower the interest rate for this financial instrument.
Property location
This is also a major determining factor as a property at a prime location fetches higher resale value. In case of credit default by borrowers, lenders can sell off this property for debt recovery.
Tenor of a loan
Tenor is inversely related to the home loan interest rate. A longer tenor will fetch a higher interest rate and vice versa. A longer tenor simultaneously means that a borrower has to pay a higher number of EMI; thus, tenor becomes one of the most important factors to consider. To get a proper understanding, lenders advise opting for a home loan calculator beforehand.
Job profile
The job role and income of an applicant also affect a home loan’s interest rate. A secured and high source of income ensures trust within a lender, as these applicants are more likely to pay EMIs within time.
Selected HFCs also offer pre-approved offers that simplify and expedite loan processing. Such offers are available on a range of financial products like loans against property, home loans, etc. Individuals can enter their name and contact number to check their pre-approved offers.
Thus, most experts believe that the current repo rate of 4% will positively impact the real estate sector and will help it revive after its poor performance in the past couple of years.