Being a homeowner is not an easy task as the entire procedure of availing home loan makes a person run from pillar to post. But, apart from comparing the financial institutions and documenting paperwork, the home loan applicants do not consider few essential terms which mean a lot to them particularly while repaying the home loan. So, here in this blog post, we help you known about the financial terms that sound heavier than owning a home:
1. Repo Rate
Money is an essential thing for every person and the financial institution like banks are here to help you with it. Also money is the first and foremost thing required to run a strong economy. Hence, the banks also sometimes run out of monetary funds and this is the time when these financial institutions approach RBI –Reserve Bank of India that heads all the banks in India for money. The RBI lends asked amount of money but at a certain rate. It means that the bank availing money from the Reserve Bank of India is required to pay back the same amount of money with certain interest. This interest is called as Repo Rate. The banks borrow the required amount of funds from the RBI by selling their securities and bonds. The Repo rate is also used as a damage control tool in order to control inflation and liquidity. The Reserve Bank of India increases Repo Rate at times when this body feels that more money is required to be circulation and as a result, the banks pay an increased amount of borrowed funds.
The banks find it difficult to pay borrowed funds as per the escalated Repo Rate and thus it reflects as in increased percentage of the interest rate on the home loan and other funding. This impact the home loan borrowers as they have to pay high-cost Equated Monthly Installments [EMIs].
*The changing Repo Rate some time favors home loan borrowers as the fluctuation in this rate won’t hinder the banks with sufficient fundings.
2. Reserve Repo Rate
The banks invest in Government securities via RBI instead of lending money to people for buying/investing in property and various other places as it incurs low-risk. These investments made by the banks are charged by the Reserve Bank of India [RBI] and is known as the Reserve Repo Rate [RRR]. This is the fixed rate at which banks lend money from RBI and the Reserve Bank of India often use this financial term to manage money circulation in the country after assessing economic conditions time and again. The RRR [Reserve Repo Rate] is essential for liquidity in the economic health of a country and thus RBI revises this rate in order to earn more profit. The increase and decrease in the Reserve Repo Rate [RRR] leave an impact on the home loan borrowers too and thus the applicants of such loan must review this rate before submitting the home loan application.
3. Base Rate
Introduced in July 2010, this financial term replaced Benchmark Prime Lending Rate [BPLR]. The minimum interest rate at which banks offer home loan to people is known as the Base Rate. The banks/financial institutions have the right to revise this rate as they are solely responsible for fixing it directly. However, the Reserve Bank of India [RBI] controls this change indirectly by ensuring use of Repo rate. For example, the decrease in Repo rate from RBI is likely to benefit the home loan borrowers as the banks sometimes lower the base rate too. The Base Rate varies from banks to banks as some banks keep margin on it whereas some offer the base rate directly.
4. Cash Reserve Ratio
This financial term also deal with liquidity in the economic system. Known as CRR [Cash Reserve Ratio] this is a specific amount which every bank is liable to be deposit with the Reserve Bank of India [RBI]. This deposited amount is a calculated fixed amount which every bank is required to hold as reserves with RBI. This deposit can either be in the form of Cash or deposit. For example, currently, the CRR in India is 4% which means that the increase in the bank’s own deposit by Rs.100 will make them liable for deposition of Rs 4 as cash reserve with the RBI. The hike/dip in the Cash Reserve Ratio reflects money lending and home loan borrowers differently.
5. Statutory Liquidity Ratio
All banks are required to maintain a specific percentage of their Net Demand and Time Liabilities also known as [NDTL]. This maintained funds can be in terms of cash, gold or Government Securities. The Net demand liabilities have to be paid on demand such as saving deposits whereas the time liabilities can only be utilized or withdrawn only after completing a particular period. This combination of ratio on the liquid assets and NDTL is known as the Statutory Liquidity Ratio [SLR]. The Reserve Bank of India has currently permitted 2 % more statutory liquidity ratio [SLR] to meet the liquidity coverage ratio. Currently, the SLR [Statutory Liquidity Ratio] is 21.50 percent.
Keep all the above mentioned financial terms in mind when planning to avail home loan.