Repo rate refers to the interest rate at which the Reserve Bank of India (RBI) lends to commercial banks in the country. In India, the current repo rate stands at 6.50% which is subject to revision according to the performance of the economy.
Individuals planning to take a home loan should be mindful of the changes in repo rate since it impacts the interest rate of the loan. Know more about the repo rate and its impact on the home loan interest rate.
What is the impact of the repo rate on home loans?
Mentioned below are the key impacts of the current repo rate on home loans:
- Change in the interest rates for new loans
A sudden fall in the current repo rate does not result in lower home loan interest rates for the present borrowers. However, if individuals apply for new loans, they may get the credit at a more affordable interest rate.
- Fluctuation of EMIs
When there is a drop in repo rates, the amount of home loan EMI can decrease as well and vice versa. This is because of the reduction of the interest rate after the decrease in the repo rate.
So, with a decline in the EMI amount, individuals can save money. Repaying lower EMIs gives more flexibility to individuals, letting them plan even for other future expenses.
Apart from the effects of repo rates on housing loans, there are some important factors regarding repo-rate-linked housing loans that a borrower should know.
Important factors about repo-rate linked home loans
Borrowers availing a repo-rate-linked housing loan should be aware of these factors:
- Willing borrowers must remember that eventually, it is the financial institution which decides the rate of interest, not the repo rate. Even if the current repo rate is changed, the interest rate for a housing loan may remain the same or the opposite can also happen.
- During the period of increasing interest rates, repo rate-linked housing loans cannot be favourable for borrowers. They should wait a few days till the interest rate becomes normal.
After knowing about the impact of repo rates on home loans, a borrower needs to be aware of several other important things before applying for a housing loan.
Things to consider before getting a home loan in India
Individuals willing to apply for a home loan to buy their dream house should consider these key things while availing this credit facility:
- Credit score and report
Before approving a loan request, lenders check the CIBIL score and credit report of applicants. This is because the CIBIL score and report display their creditworthiness. The higher the credit score, the better the chances of getting a loan approval. In the case of housing loans, applicants should retain a solid credit score of 700 or above.
- EMI amount
Using a home loan EMI calculator can help prospective borrowers evaluate their monthly loan obligations within a fraction of a second. As a result, they can make proper financial management.
- Prepayment
While applying for a housing loan, individuals should be aware of its prepayment and foreclosure charges. For this, they can visit the websites of lending institutions and compare their loan offers. By doing so, they will be able to select the best loan offer that features a lower interest rate alongside reasonable foreclosure and hidden charges.
- Pre-approved offers
There are many reputed lenders that provide pre-approved offers to their existing borrowers. These offers are available on various financial products such as housing loan, LAP, etc. that expedite the loan application process. To get them, existing customers just can check their pre-approved offers by providing their name and contact details.
- Tenor
While choosing a housing loan, borrowers need to choose a tenor sensibly. A longer tenor may reduce the amount of EMI but increase the outgoing interest considerably. On the other hand, choosing a shorter tenor will automatically increase the EMI amount but lessen the outgoing interest. However, it entirely depends on the financial strength and capacity of a borrower while selecting the tenor.
After knowing these important things, individuals can proceed with applying for a housing loan. However, they must meet the eligibility criteria and gather the necessary documents to avoid facing rejection and a last-minute rush.
Eligibility criteria of a home loan
While applying for a housing loan, a borrower must fulfil the eligibility parameters as declared by the lending institution. Usually, these eligibility criteria differ from one lender to another, so it is necessary to conduct thorough research before choosing the lender.
Here are some common eligibility criteria for home loans:
- An applicant must be an Indian citizen
- Age of salaried borrowers must be between 23 to 62 years
- Age of self-employed borrowers should be between 25 years and 70 years
- Salaried persons should be associated with a private, public, or MNC and have a minimum of 3 years of working experience.
- Self-employed individuals should have at least 5 years of business experience
Individuals who satisfy all these parameters can use a home loan eligibility calculator to know how much housing loan amount they are eligible for. They can easily find this tool from the website of their lenders.
Documents required for a home loan
Once individuals meet the eligibility criteria, they need to keep some important documents handy and present those while applying for a home loan. Following are the documents required for a home loan:
- KYC documents (ID and address proof)
- Form 16
- Income proof (bank account statement for last 6 months, current salary slips, profit and loss statement, balance sheet, TDS certificate)
- Income Tax Returns
- Business proof documents like title deeds, property tax receipts, allotment letters, etc. (for self-employed persons)
Being a secured credit product, housing loans have made buying or building the dream home easier than ever for many people. It lets them borrow a large amount of capital at a low-interest rate. However, borrowers need to stay updated with the current repo rate before availing a home loan as it has a direct impact on the interest rates provided by lenders.