The interest rate is one of the most influential factors for a Loan. This is particularly evident with Home Loans. The Home Loan interest rate is of two types: fixed and floating. The fixed rate is set at the time of financing; hence, the Loan repayment amount remains fixed. The floating rate is subject to market fluctuations, affecting the Loan repayment amount.
This blog explains how fluctuating floating Home Loan interest rates impact Loan repayment. This helps you manage this financial commitment effectively.
Why Home Loan Interest Rates Fluctuate?
The current Home Loan interest rates are linked to the Reserve Bank of India (RBI) Repo Rate.
When the RBI increases the Repo Rate, Indian banks and financial institutions hike up their floating Home Loan rate.
As the RBI decreases the Repo Rate, banks and financial institutions lower the floating Home Loan rate.
Note:
- The Repo Rate stands for the Repurchase Agreement or Repurchase option. It is the interest rate at which the RBI lends funds to Indian commercial banks.
- The RBI uses the Repo Rate as a tactic to regulate liquidity and control inflation in India. Hence, rate change influences several financial elements.
How do Home Loan Interest Rate Fluctuations affect its Repayment?
The current Home Loan interest rates affect your Equated Monthly Instalment (EMI) and the total Loan amount (Principal + interest). The following pointers explain this clearly and concisely:
EMI:
- As the floating Home Loan interest rate rises, your EMI amount increases.
- This means you may need to allocate additional funds for the month for the repayment.
- When the floating Home Loan interest rate drops, your EMI amount decreases.
- You may repay the EMI with the same or even lesser funds than you initially expected.
Total Loan amount:
- As the floating Home Loan interest rate rises, the total interest liability increases.
- This increases your total Loan amount.
- When the floating Home Loan interest rate drops, the total interest liability may decrease.
- This keeps your total Loan amount in check.
How to Manage Fluctuating Floating Home Loan Interest Rates?
Managing the fluctuating Home Loan interest rates is essential for smooth repayment and Loan affordability optimisation. Following are practical ways to help you do so:
- The RBI’s Monetary Policy Committee (MPC) reviews and revises the Repo Rate every two months. It could also revise the rate at any time if the economic conditions require it. The Repo Rate revision will instantly impact the Home Loan interest rate. So, track the Repo Rate movements and pay attention to any intimation by the bank. This makes you well-informed to take the next steps.
- Once aware of the current Home Loan interest rates, use a Home Loan EMI calculator. This will help you estimate the EMI for the month, allowing you to allocate funds accordingly. This facilitates payment without any issues. The calculator is readily available for use on the bank’s website/ banking app.
- You may reconsider the tenure, as the Home Loan interest rate changes owing to its impact on the EMI and the total Loan amount. If the EMI and total Loan amount exceed your affordability, you could extend your tenure to manage the payments without default or financial strain. You can consider a tenure adjustment in case of a decline in the interest rate, too. The Home Loan EMI calculator comes in handy here. It helps you understand the impact of tenure change in real numbers.
Summing It Up
There are two types of Home Loan interest rates: fixed and floating. The floating Home Loan interest rate is linked to the RBI’s Repo Rate. As the Repo Rate rises, banks and financial institutions increase the floating Home Loan rates, and vice versa. This impacts your EMI and the total Loan amount. Therefore, learn to manage it to ensure smooth repayments and optimise the Loan affordability.
