The Reserve Bank of India (RBI) is the central bank of India that sets policies and rules for the banking system in India, meaning that all banks must follow what is set.
The main intention of establishing the RBI was to manage the country’s financial system based on its changing economy. There are different guidelines for different parts of the banking system; RBI guidelines for home loans are valid for a certain duration until they are changed. This change is often mainly due to the change in India’s economy and all banks of India are mandated to adhere by these guidelines.
Home loan applicants have the option to choose either fixed interest rate (interest rate remains the same and does not change even if interest rate changes in the market) or floating interest rate (interest rate changes as per changes in the market); both have their own set of advantages and disadvantages. However, a lot of loan borrowers opt for fixed interest rate as it helps in better financial planning throughout the tenure of repayment.
The principal amount of home loan that the applicant can avail depends on their credit score, financial strength, value of the property that would be invested in, etc. A person’s income may fluctuate for many reasons including a change of job and recession. In case of an increase in income, more can be saved and the possibility of prepayment of the borrowed loan far before the end of tenure is highly possible. While prepayment attracted extra charges for a long time, the current RBI guidelines for home loans waiver off the same for floating interest rate but fixed interest rate does attract penalty at 3%.
Repo Rate or Repurchase Rate/Agreement
On one hand, repo rate is the rate that affects interest rates that commercial banks may impose on loan borrowers. It is the rate imposed by RBI on commercial banks when they borrow money from the bank. Quite clearly, repo rate imposed by RBI is directly proportional to the interest rate on home loans imposed by commercial banks.
On the other hand, reverse repo rate is the interest rate that RBI pays to borrow money from commercial banks which could be in the form of securities to sell the same at a higher price in the future. According to current RBI guidelines for home loans, repo rate is 4%.
Loan To Value (LTV) Ratio
LTV ratio is the ratio of the loan amount that you are expecting to the value of the property. Currently, according to the RBI guidelines for home loans, LTV for home loans that are under 30 lakh rupees up to 90% while LTV for home loans that are above 75 lakhs rupees is up to 75%. Also, the new guidelines allow banks to add registration, stamp duty, etc. for properties (houses) that are under 10 lakh rupees. For any property of a higher value than this, none of the above charges should be added.
Provision for Balance Transfer
On a bright note, RBI guidelines for home loans have waived off charges that were earlier applicable on foreclosure of home loans. Balance transfer of home loan from one loan provider to another is also now possible at a lower interest rate.
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