Impact of No Rate Change on your Home Loan and EMI

The Reserve Bank of India (RBI) repo rate: In the sphere of personal finance, one among some crucial factors that determines borrowing costs in India is the RBI's repo rate. Repo rate has a direct impact on how much banks charge for lending money out to borrowers (particularly home loans) and what consumers payout as Equated Monthly Installments or EMIs every month. However, when the RBI keeps repo rate unchanged — an occasional occurrence as in some cases— it has a tacit effect on home loans and EMI too which deserves consideration.

This article will look at what the unchanged repo rate implies for current homeowners and home-buyers alike, along with how this decision affects your mortgage rates + impacts your financial planning in case you are thinking of purchasing a new house.

What is the Repo Rate?

Repo rate is the price at which RBI lends money to commercial banks. This is an instrument of monetary policy to control inflation, liquidity and financial stability. Movements in the repo rate have passed through to borrowing costs for consumers as they trickle down from lenders. A higher repo rate makes borrowing more expensive, and a lower repo rate drives down the cost of lending.

Why the RBI do not increase Repo Rate?

The repo rate is the interest RBI charges for their loans to banks: Its always a good news when it doesnt change as its very rare. It means that economy has stabilised and there will not be hike or drop of borrowing costs. The central bank reaches this decision sometimes when it determines that inflation is well secured or that economic growth rate is stable, and at other times in response to where the global economy will not allow for cutting or raising interest rates.

As legendary economist John Maynard Keynes said, “The difficulty lies not so much in developing new ideas as in escaping from old ones.” The same applies to central bankers for whom setting rates is a delicate tightrope and inaction the optimal action.

Home Loans — Immediate Impact

If you have a home loan, an unchanged repo rate would likely come as some welcome news. Ideally, this means that those on floating rate loans will see no increases in their interest rates straightaway. Floating-rate loans are directly linked to, and company depositswill hit your interest rate mooing as well when the repo rates remains quiet.

In other words, an unchanged repo rate may keep the interest rates offered by banks to be equal too and thus offer some predictability for planning of loan obligations among new borrowers.

Illustration of Impact on Floating Rate:

Take the case of a homeowner with a debt exposure to₹50 lakh at 7.5% floating rate for 20 years EMI remains same as long as the repo rate does not change. Had the RBI increased the rate, for a borrower it would have meant an EMI increase of few thousands over his loan term.

Elapsed timeThe Repo Rate Unchanged — What it Means to EMIs

Period is the same, if repo rate remains unchanged, then existing home loan borrowers will not change their EMI on floating-rate loans. But had that repo rate been cut, then EMIs would have followed downward trajectory too; reducing the financial load on borrowers. On the other hand, a rate hike would have increased EMIs.

Double Standards In Payment Of Interest To TaxpayersBy passing on to the customer the benefit of reduced cost and then by holding them with a static rate, it is hypothetically feasible for banks. A writing company is a safe bet against general agencies, and freelancers are the bare risk since they have no proof of work done more often.

Impact on Future Borrowers

Stability in the short term means that for buyers in a home purchase conundrum, life goes on unchanged. The borrowing cost for a home loan will, therefore, remain the same and potential buyers can now expect to plan their finances in advance without worrying about hikes in interest payment on EMI every quarter.

But for all of its popularity, being stable doesn't mean that it lends itself to easier borrowing. A lower repo rate environment, for example, can mean more affordable home loans to new borrowers. In the backdrop of a constant repo rate, as is in this case potential buyers do not get any benefit of cut rates that might make loans alluring.

Mortgage interest rates & affordability

Banks tend to keep their home loan interest rates stable when the repo rate is in neutral gear. High repo rate will lead to high home loan interest rates and can be unfavorable for the potential homebuyers but, Keep reading on. In case the repo rate is already low and remains unchanged, this can create conducive conditions for homebuyers as it maintains borrowing costs at an affordable level.

As the legend Warren Buffet said, “Interest Rates are to Asset Prices as Gravity is To Matter. It shows you how important interest rates are in determining whether or not a home buyer can afford a house. A fixed repo rate keeps borrowing prices stable, which makes loans neither more affordable nor less so.

Long-Term Financial Planning

If you are in the process of planning for a home loan, here is how this would affect your financial strategy. The unchanged decision from the RBI likely means there will be no immediate change in loan rates, but it could impact your expectations over the longer run.

Likewise, if you anticipate RBI lowering repo rate in near future then choose a floating-rate loan to gain from the possibility of upcoming reduction. That said, it may be prudent to secure a fixed-rate loan if you believe that rates are likely to increase and the repo rate is unchanged.

Also, since inflation is an important determinant of RBI in arriving at the repo rate decision, it would aid to understand a bit more on the macro investment numbers. That means, as long as inflations remains within its 4% plus or minus 2 percentage point target range and is not flaring up dramatically beyond these levels on a sustainable basis — the RBI may keep repo rate untouched going ahead in turn good news for borrowers over the length of time.

The Housing Market and The Economy

An unchanged repo rate can also have a ripple effect on the wider housing market. For housing developers with large inventory, and the buyers also has experience a stable financing environment. This can put an upward pressure on the real estate market, potentially driving new construction and keeping property prices stable

Conversely, a stagnant repo rate in the face of economic volatility or if inflation is on the rise may cause banks to be more cautious in their lending practices thus tightening liquidity for both developers and buyers.

Key Takeaway: Preparing For A Steady Rate Environment

Not as much of a news, when the RBI decides to keep the repo rates unchanged rather than reduce/ increase it, but what does this mean for you and your home loan-EMIs. For those with loans, it provides certainty of repayment amounts without the nasty shocks. Pro: The Fed holds the line on ratesFor potential homebuyers, that means predictability in borrow costs but not necessarily a better savings rate cut

Knowledge Pays The Best Interest Benjamin Franklin said it best, "An investment in knowledge pays the best interest. This information regarding repo rates and their implications on home loans prepares you to take calculated decisions that support your financial game plan.

But, while a status quo in the repo rate decision may seem neutral it actually has a lot of bearing on home loans, EMIs and hence affordability. Those that are well-informed and prepared appropriately, can take advantage of this steady-rate environment with little to no hesistancy both today as current borrowers — and in the future when purchasing a home.