Home Loan EMI and RBI Rate Cut. How are they Related?

The latest monetary policy implemented on 6th August 2020 saw the RBI keeping the repo rate same for the third time in a row. These rate cuts bear a direct impact on the lending rates at which financial institutions offer loans.

Thus, while estimating your EMI payments with a house loan calculator for loan repayment, you arrive at an amount that is low, affordable and well within your budget.

Such rate cuts particularly benefit a person borrowing a secured loan like a housing loan. It is because the EMIs on such loans are high, and as an impact of rate cuts, they see a significant decline.

Now, check out the important concepts related to RBI rate cut and interest calculation by financial institutions. It will help you understand how rate cuts impact loan EMIs.

The Concept of Repo Rate

Financial institutions in India resort to borrowing money from RBI in case of any fund shortages. The interest rate at which RBI lends this money to these institutions is known as the repo rate.

The rate is also used as a tool to control the flow of money in an economy. An increase in repo rates discourages these institutions from borrowing from RBI. This, in turn, leaves them with limited funds they can offer as a loan to common people.

On the contrary, a cut in repo rate increases the flow of money to financial institutions. It promotes lending to common people as with the reduced cost of borrowing; lenders also extend the benefit of a rate cut to its customers by reducing the MCLR reduction, and a subsequent decrease in applicable interest rate.

Marginal Cost of Funds Based Lending Rates (MCLR)

MCLR is the minimum interest rate at which a lending institution offers loans to its customers. It comprises two components – the base rate and a spread, which is unique to every lender.

Any change in MCLR rate has a direct impact on your EMIs as it affects the interest rate at which your lender calculates the EMIs. Picking up from the repo rate, a repo rate cut from RBI reduces the MCLR. As a result, the housing loan interest rates also decrease, and you get to pay lower EMIs.

EMI Amount and Payment

Determining your loan EMIs before you apply is of utmost importance. Your loan tenor plays a crucial role in increasing or decreasing the monthly installments apart from the rate of interest and loan amount.

Hence, using an EMI calculator is beneficial to assess your repayment plan. With this simple online tool, you can get to avail several benefits of calculating EMI before taking a home loan. It calculates your monthly installments through the amortization method. The amount arrived at varies as per your inputs, i.e., interest rate, loan amount and repayment tenor.

Thus, if your lender charges a lower rate of interest, the payable EMI will be consequently reduced as per the interest reduction. It sums up how the RBI rate cut impacts your EMIs.

Hence, check when availing a housing loan, look out for a lender that provides it at the lowest rate of interest. It will help minimize the EMI amount and make repayment affordable. Before applying, make sure you check the home loan’s fees and charges and the home loan eligibility criteria and documents to improve your chances of loan approval.