In the first part of the series, we talked about customer-centric factors that affect home loan rates of interest.
Now comes the second part, where we will talk about the macroeconomic factors that impact your home loan interest rate. What are these? Let’s find out.
1. Repo Rate
Of late, the repo rate has been a talking point for all - from economists to commoners. The Reserve Bank of India (RBI) in its latest monetary policy committee meet, hiked the repo rate by 50 bps to 4.90%. With repo rates going up, the home loan rate of interest will also shoot up. If you have availed a home loan on a floating rate of interest, in all likelihood, you will receive or would have received an intimation from your lender regarding a hike in the rate of interest.
What is Repo Rate?
It is the rate at which the RBI lends money to commercial banks. With repo rates going high, the cost of borrowing for NBFCs has become dearer. In other words, it has become more expensive NBFCs to avail funds from commercial banks. In a bid to offset this cost, they have little option but to pass on the burden of the increased hike upon borrowers.
Your home loan interest rate may further go up in such a situation. However, if you have availed of a home loan on a fixed rate of interest, the hike in repo rate will have no impact. This is because the interest rate will remain the same throughout the loan tenure.
Inflation not only reduces the purchasing power of money but also has an impact on the home loan interest rate, albeit a little differently. When inflation shoots up, as it is now, central banks aim to reduce the supply of money in the economy. For this, they hike the repo rate.
This acts as a disincentive for lenders, including NBFCs, to borrow money. If they need to borrow, they need to pay a high cost, some part of which they pass on to borrowers by hiking rates. So, when inflation is on the rise, the RBI tries to bring it under control by increasing the repo rate. And in such a scenario, home loan interest rates are bound to go up.
MCLR or marginal cost of fund-based lending rate (MCLR) is a benchmark interest rate introduced by the RBI for Banks in 2016. MCLR replaced the then-existing base rate system and was introduced to ensure better pricing of floating loan rates by banks.MCLR is an internal benchmark for Banks. Under the MCLR regime, lenders need to adjust their interest rates as soon as there is any change in the repo rate. However, in 2019, RBI rolled out a directive for Banks to link housing loan directly to Repo Rate for better transmission.
Hike in MCLR by Lenders
Following a spike in the repo rate, several lenders have increased their MCLR rates. This has increased home loan interest rates and the subsequent EMIs. If your home loan is linked to the lender’s MCLR rates, in all likelihood, your interest rates will go up and you need to pay higher EMIs.
Should you opt for home loans through other financers such as NBFCs, please note that their lending rate is determined by their own internal policies. You can find out more about the lending rate on their respective websites.
4. Retail Prime Lending Rates
Retail Prime Lending Rate (PLR) is the rate at which housing finance companies lend to their customers. It is the benchmark against which lenders price their loans to customers. An increase in retail prime lending rate will increase your Home Loan interest rates and push up the EMIs.
Of late, prominent housing finance companies have increased their retail prime lending rates, resulting a spike in Home Loan EMIs.
Unlike customer-centric factors that are under your control to some extent, macroeconomic factors are not. However, what you can do is talk to your lender and find out ways to facilitate repayment. Lenders can offer EMI breaks or adjust the loan tenure so that you don’t feel the pinch of increased EMIs.
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Disclaimer:The above information is for illustrative purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision.