What Determines the Rate of Interest?
Nov 09, 2019 Home Loan
Buying a house is a dream of every Indian and with the banks and financial institutes giving out home loans, the dream of owning a house becomes a reality earlier in life. As compared to the previous generations who saved all their lives to buy the house by retirement. The rules have changed now. Young professionals are now investing in property earlier in their life, as early as the late 20s.
With RBI changing their repo rates every two months, a home buyer would expect that their home loan interest rate will be affected by a lot. But in reality, this is not the case. A home loan interest rate is driven by many factors among which the repo rate is one of the factors.
Recently the RBI has directed the banks to link their interest rates to the repo rates so that the borrowers can enjoy the reduced repo rates that the RBI is offering. The RBI has also asked the banks to reset their EMI rates every three months. For example, if you have taken a loan in September, then you have taken the loan with the repo rate applicable during that time. But if the RBI has revised its repo rate in October, you will only be able to enjoy the benefit of the same in December. But if RBI resets its repo rate in December as well, then the buyer will be able to enjoy the double benefit.
The RBI circular on September 4 stated that the banks are free to charge the spread over to the borrowers. And the credit risk premium may change only when the borrower's credit assessment undergoes a substantial change, as agreed upon in the loan contract. Further, other components of spread including operating cost could be altered once in three years.
This means that if there’s any change in your financial health then you are at a high credit risk for which you will be charged correspondingly.
Even though the RBI has reduced their repo rates by 110 bps this year itself, the reason for slow sales int eh market is due to many factors including, rise in unemployment, slow economic output, low consumer confidence, etc.
Repo rate is the rate at which the RBI lends the money to the private sector banks against the government bonds. When the RBI reduces their repo rates, then it becomes cheaper for the banks to take the loan from them and to pass the benefit to the user, they reduce their interest rate. When the RBI increases its repo rate, it becomes cheaper for the banks to invest in government bonds.
With RBI changing their repo rates every two months, a home buyer would expect that their home loan interest rate will be affected by a lot. But in reality, this is not the case. A home loan interest rate is driven by many factors among which the repo rate is one of the factors.
Recently the RBI has directed the banks to link their interest rates to the repo rates so that the borrowers can enjoy the reduced repo rates that the RBI is offering. The RBI has also asked the banks to reset their EMI rates every three months. For example, if you have taken a loan in September, then you have taken the loan with the repo rate applicable during that time. But if the RBI has revised its repo rate in October, you will only be able to enjoy the benefit of the same in December. But if RBI resets its repo rate in December as well, then the buyer will be able to enjoy the double benefit.
The RBI circular on September 4 stated that the banks are free to charge the spread over to the borrowers. And the credit risk premium may change only when the borrower's credit assessment undergoes a substantial change, as agreed upon in the loan contract. Further, other components of spread including operating cost could be altered once in three years.
This means that if there’s any change in your financial health then you are at a high credit risk for which you will be charged correspondingly.
Even though the RBI has reduced their repo rates by 110 bps this year itself, the reason for slow sales int eh market is due to many factors including, rise in unemployment, slow economic output, low consumer confidence, etc.
Repo rate is the rate at which the RBI lends the money to the private sector banks against the government bonds. When the RBI reduces their repo rates, then it becomes cheaper for the banks to take the loan from them and to pass the benefit to the user, they reduce their interest rate. When the RBI increases its repo rate, it becomes cheaper for the banks to invest in government bonds.
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