Real estate developers felt that residential property in India would have received an additional boost had the Repo Rate by the RBI dropped from the current rate of 6.25 basis points. The meeting that took place last month on Feb 8 was part of the sixth bimonthly monetary policy review of the RBI. Many stakeholders in India’s real estate sector had hoped that after the meeting the RBI members would announce a drop in the Repo Rate making home loans cheaper to households anxious to buy a new property in India.
How the Repo Rate Works?
A lower Repo Rate means that commercial banks across India are incentivized to lend to buyers more aggressively by lowering the interest rate charged for home loans, personal loans, and auto loans. Realestate in India is more affordable to finance when the repo rate is low. Since the Repo Rate is the rate at which commercial banks borrow capital from the RBI, a lower Repo Rate means that commercial banks are able to borrow money at lower rate from the RBI and this in effect is expected to incentivize them to lend to consumers at a lower rate as well.
Emerging Techniques to Lower EMI’s
Recently there has been a flutter of activity from the National Housing Bank and the Indian Institute of Insurance both of which together are creating instruments related to housing insurance which would lower the interest rate of EMI’s by fifty basis points (half of one percent) if homebuyers opted to insure their house upon purchasing the property. Buying property in India may become less expensive in the not too distant future.
Differentiation Between Loans
Home insurance is insurance that is bought to insure your home against natural calamities such as earthquakes, floods, lightning, cyclones, or against damage inflicted upon a property due to terrorism or vandalism. Home Insurance is different from Home Loan Insurance in that Home Loan Insurance is paid to a bank upon the demise of a borrower who had been thus far been unable to pay the entire amount plus interest borrowed from a bank or financial institution. Many properties in India are already financed with Home Loan Insurance, yet Home Insurance is purchased less frequently in the country.
Methodology of Cheaper Loans
Properties in India constructed by builders will command a lower risk premium if homebuyers opt to purchase home insurance. Hence builders will eventually share the savings from lower risk premiums with homebuyers. From the perspective of those who buy insured property in India, while they will pay extra to buy home insurance, the cost of the loan they have taken from banks would fall and lead to greater savings than had they not undertaken to purchase home insurance. Real estate websites in India will allow consumers to calculate the savings they would earn on EMI’s by opting for home insurance.