When you want to buy property in India and take a home loan from a bank, you have to pay interest to the bank on the principal amount, at a rate that is fixed by the bank. These interest rates for home loans impact the monthly amount (EMI) that you, as the homeowner pay for a mortgage loan. The monetary policy of the RBI has a deep effect on these interest rates for home loans, and ultimately, the whole sum that you end up paying up to the bank for your mortgage loan.
The central bank has the responsibility of many tasks that include controlling the extent of money being circulated, the liquidity in the system, the way the banks operate, and the exchange ratio for currency. The RBI or commercial banks use specific instruments that have a deep effect on your home loan. Let us find out what some of the key terms mean…
Dejargoning Repo Rate
The RBI lends money at a specific rate to commercial banks, normally against government securities, and this rate is known as the Repo Rate. When this repo rate is raised by the RBI, the banks must pay more to borrow money from the central bank. Again, when the RBI reduces the repo rate, by say, 25 basis points, it costs less money for the commercial banks to borrow from RBI. So, when RBI hikes the repo rate up, home loan interest rates also go up, and when they slash it, the home loan interest rates reduce. When this occurs, your EMI also goes down. However, this may be different in certain stages, when commercial banks have enough cash and do not depend on the RBI to get it.
Dejargoning Reverse Repo Rate
The rate that banks charge on funds that they invest in government securities with the RBI is known as reverse repo rate. When this rate rises, banks may increase the interest rates for home loans, because it is more profitable for commercial banks to invest in government securities with low risk, rather than lending it to individuals who are looking for residential real estate investing. The interest rates for home loan may fall when the reverse repo rate falls.
The percentage of bank deposits that banks must keep with the RBI is known as Cash Reserve Ratio or CRR. It is an instrument that the RBI uses to control the liquidity in the system. If the CRR is 4, then the banks must keep Rs. 4 with the RBI, whenever the bank deposits go up by Rs. 100. The higher the CRR, the lower the amount of money, banks can invest or lend out to people. So, the liquidity is lower when the CRR is higher and vice versa. It is not mandatory that an increase in the CRR will lead to home loan interest rates increasing. However, because the supply of credit is reduced due to a CRR hike when RBI increases the CRR, banks raise the interest rate for mortgage loans, if the demand for credit does not go down proportionately.
The percentage of funds that a bank must maintain in the form of liquid assets at any point in time, is known as the Statutory Liquid Ratio or SLR. You should not that banks should maintain these funds in the forms of bonds, precious metals, or government securities, and not cash. The current SLR rate is 19.5 %. These funds have mostly been invested in government securities. Banks have less money for commercial operations when SLR is high, and therefore, have less money for lending out. When this occurs, interest rates for home loans go up. Similarly, when the SLR is low, the interest rates for home loans may come down.
Note: Both CRR and SLR have an impact on the extent to which commercial banks can lend money to home purchasers. If the RBI maintains these rates as high for too long a period, banks would take more care and lend less money. This would make it a difficult situation for people seeking home loans from banks.
Dejargoning Base Rate
The lowest interest rate that a bank charges its customers is known as the base rate. The banks decide this base rate, and the bank management is within its rights to change it. The RBI does not exercise direct control over it. However, it does have an impact via the repo rate and other instruments. For example, if RBI decreases the repo rate, banks may reduce the base rate as well.
When the central bank slashes the repo rate, banks may choose to extend this benefit to their customers by bringing down the base rates. You should remember that the base rate is not the same as the interest rate at which banks give loans to home purchasers. Even though the Public Sector Unit or PSU banks use the base rates for lending, most commercial banks use the base rate plus a margin when they lend. The interest rate is dependent on many factors, like your credit rating.
Now, that you know about these key terms, we hope that if you are in the process of looking for Property for sale in Noida or ready to move property in Noida or any other place, they will help if you approach a bank for a home loan.