A rise or fall in the repo rate can affect your debt repayments, savings, and investment – the volatility can even affect your ability to buy a property. We demystify the complexity behind interest and lending rates.
Here are some key insights.
Let’s start with the basics.
What is the repo rate?
The repo rate, also known as the repurchase rate, is the rate at which the Reserve Bank of India lends money to the banks. The banks, in turn, lend money to their clients.
What is the repo rate?
So, how does the Reserve Bank’s repo rate affect a bank’s prime lending rate?
More importantly, how does it affect you as a young person when you’re seeking a loan or opening a savings product?
Here’s how the repo rates may affect you in the short and long term.
1. Repo rates affect lending –
The Reserve Bank’s main purpose is to stabilize our currency and economy. Often a higher repo rate is used to slow inflation. Money becomes more expensive for banks to borrow, which means your credit becomes more expensive too.
2. Repo rates affect property prices –
When the repo rate rises, so do property prices. Buying a home or investment property becomes more expensive as you simply don’t have the same buying power.
To offset this, you could think about putting down a higher deposit on a new place or look at buying a more modestly priced property.
If you are willing to wait for interest rates to drop, you can possibly get more value for your money when buying property. If you are lucky enough to be a cash buyer, you can make a huge savings.
3. Repo rates affect your return on savings
The good news is that a higher repo rate, conversely, affects your savings potential. When interest rates rise, so do your returns on savings. Of course, other factors could influence savings.
Reserve Bank of India cuts repo rate by 35 basis points, EMIs to go down!
The Repo rate is the interest rate at which the Central Bank (RBI) lends money to banks. When the cost of borrowing goes down for banks, they can lower their marginal cost of funds-based lending rate (MCLR), which directly impacts loans
Since April 2016, all loans sanctioned by banks including car loans and home loans are linked to the bank’s MCLR. A lower MCLR will effectively mean a lower interest rate and, thereby, a low-interest burden, other factors remaining constant. A cut in the bank’s MCLR benefits all car loan and home loan, borrowers. “This rate cut will have a direct impact on the real estate sector, provided the banks, in turn, transmit the same by a corresponding reduction in lending rates to those seeking home loans.
The MLCR of banks has been falling but at a lesser pace. State Bank of India (SBI) had cut its MCLR by 5 basis points across all tenors with its 1-Year MCLR coming down from 8.45 percent per annum to 8.40 percent per annum with effect from 10th July 2019. In the case of Bank of Baroda, ( effective 07.07.2019 ) the 1-year MCLR is 8.60 percent. The effective home loan interest rate will be a one-year MCLR plus 1 percent based on the applicant’s risk rating. Therefore, the effective Bank of Baroda home loan interest rate will vary between 8.60 percent and 9.60 percent. For HDFC, a housing finance company, the interest rate is linked to its internal benchmark, Retail Prime Lending Rate (RPLR) on which it announced a cut of 10 basis points effective August 1, 2019.
New home loan borrowers can now start exploring home loan options with the banks. Do not merely look at the bank’s MCLR but know the actual home loan interest rate before finalizing the deal. Banks are allowed to charge a Mark-Up on the MCLR before disbursing the loan. Finally, make a pre-payment to repay the home loan as soon as possible and own your home with 100 percent equity of your own.
RBI has also trimmed the GDP growth forecast for the current fiscal to 6.9 percent from 7 percent.
If rates are higher, you should take advantage of the rise and look at putting some money away in a notice or fixed deposit savings account.
BE A WISE INVESTOR! – Connect