SBI launched repo rate-linked home loan (RLLR). How does it differ from the MCLR?

Homebuyers  may  see  some  respite  from  sticky  lending  rates on home loans  as  banks have  started  passing  on the  benefits  of Reserve  Bank  of  India’s (RBI’s)  repo  rate  cuts  to  them. State  Bank  of India (SBI), the country’s largest  lender, is  the  first bank to offer home  loan  with  a RBI’s  repo  rate-linked  lending rate (RLLR). SBI  has launched  RLLR, an  external  benchmark  of  the  bank, home  loan  product  effective  01  July.

Now  from  1st  July, there  is  an  option  for  the  borrowers  to  choose  between  MCLR  linked  home  loan  and  SBI’s  RLLR  home loan  which  is  linked  to  the  RBI’s  repo  rate. If they  opt  for  the  RLLR  linked  home  loan, they  will  see  a direct  and  immediate  impact whenever  the  RBI  changes  its  repo  rate  as  there  is  no  reset  clause  like  MCLR. This  is  especially  attractive  at  a  time when  the  rates  are  falling. This  move was  swiftly followed by other  lenders, especially public  sector  banks, such  as Syndicate Bank, Bank  of  India, Union  Bank and  Allahabad  Bank etc.

So  far, the  interest  rate  for  normal  home  loans  are  linked  to the  marginal  cost  of  funds-based  lending  rate  (MCLR), an internal  benchmark  set  by  banks, since  April  2016. The MCLR  was  a  departure from  the  earlier  base  rate  regime. The  RBI’s intention  was  to  allow better  transmission  of  its  repo  rate  cuts  to  consumers.

In  fact, there  was  a  regular  complaint  in  the  past  from borrowers  that the  benefits  of  the  deduction in  the repo  rate  by  the  RBI  were  not getting  transmitted  to  the  end  consumers even  under  the  MCLR regime. However, whenever  there  was an increase  in interest  rates  by the  regulator, the  banks  were very quick  to pass that  on  to  borrowers.

What  does  SBI’s  RLLR  mean  for  borrowers?

To  begin  with, let’s  first  understand  the  policy  rate  or  repo rate. Repo rate  is  the  interest rate  at  which  the RBI  lends short-term  money  to commercial  banks. In  fact, the  repo  rate  lays the basis  for  interest rates on loans in  India. However, the transmission  of  the rate  cut  by  the apex  bank  to  the  end customers  still  remains  slow.

So, one  of  the  RBI’s  recent  concerns  has  been  the  efficient  and faster transmission  of  its  rate  cuts  to consumers. Therefore, SBI launched RLLR linked  home  loan  for  the  speedy  transmission of policy  rates  to borrowers. The  new  repo  rate-linked  home loans could  be  cheaper  and more  transparent  for  borrowers. However, they  also, carry  the  risks of the  monthly  installments being  increased  in  size  in  the  event  of   a sustained  increase in the  repo  rate.

Eligibility  for  a  RLLR  home  loan

To  be  eligible  for  the  SBI  repo  rate-linked  home  loan, you need to have  a  minimum gross  annual  income  of ₹6  lakh. Maximum permissible  Loan-To-Value  Ratio  which  could be  80 percent  or 90 percent  of  the  home price.

RLLR  home  loan  tenure

The  maximum  loan  tenure  is  33  years  over  and  a  maximum moratorium  permitted  of  2 years  for  under-construction properties  is allowed. So, the  total  loan tenor  in  such  cases cannot  exceed  35  years.

How  repo  rate- linked  lending  rate  of  home  loans  are  fixed? 

The  SBI’s  RLLR  have  a  base  spread  of 2.25  percentage points over  the  RBI’s  repo  rate. The  repo  rate  of  the  RBI  at  the  time of  launching  the  product  in July  was  5.75%, which meant  the  effective  RLLR  would  have been 8%. On  top  of this, the bank will  add  a  risk-based  spread of  40-55  basis  points (bps), depending  on the risk assigned  to the borrower. So  effectively, RLLR  home  loan interest  rate becomes 8.40 – 8.55%  for  an amount  up to Rs 75  lakh whereas  home loans  based  on  the MCLR  is  anywhere  between  8.55 – 9.10 %  for  the  same  amount. Every  time  the  RBI  changes  the repo  rate, it  will  change  from  the 1st  of  the  following  month.

For  example, the  RBI  has  most  recently  in  August, cut  the  repo rate  by 35  bps  from 5.75  percent  to  5.40 percent. However, there  are  some  mark-ups  on  the  RLLR   rate  which pushes  the effective  rate  higher. Since, there  is  a  base  spread  of  2.25 percentage  points over  the  RBI’s current  repo  rate, subsequently, the  RLLR  will  be  further  come  down  to 7.65 percent  from  8.0 percent. Besides, the  bank  will  add  a risk-based  spread  of  40-55  bps, depending  on  the  risk  group  of  the borrower. So  effectively, RLLR  home  loan  interest  rate  would  be  8.05 – 8.20%  for  an amount  up  to Rs 75  lakh to its customers. Since, SBI intends  to  reset  the RLLR  at  the  end of the month  of a  repo rate  cut, therefore  the  rate revision should happen  from 1st September.

EMI  payments

Equated  monthly  installment  (EMI)  payments  in  RLLR  are  not similar to  a  regular  home  loan  EMI payment. The  bank  will segregate  the EMI  amount  under  this  scheme  of   the product. Here, the  principal  EMI  will  be fixed  at  principal installment while  interest  is  to  be  paid  monthly  as  and  when  applied  to  the account. You have  to  repay  a minimum 3%  of  the  principal loan  amount  every  year  in equated  monthly installments and interest  will  be in  actual.

How  RLLR  home  loans  are  different  from  MCLR?

The  SBI’s  RLLR  home  loan  differs  from  the  MCLR  linked  home loan. The  MCLR  could  be  different  for different  banks.

Your  home  loan  rate  would  automatically  reset  at  a  fixed interval to the MCLR  prevalent  at  the  time. While RBI’s  repo  rate  cuts happen  in a more  timely  manner, the  transmission of  the  same  to  the  end  consumers may  be  only  partial. However, when  interest  rates  are  rising, MCLR  provides a  cushioning  for a  certain  time.

For  example, this  year  alone, the  RBI  has  cut  the  repo rate  by  110 bps  whereas, according  to  some  estimates, banks  have transmitted  only  a 29 basis  points  cut  to  the consumers. The SBI’s  home  loan  rate  has  come  down  from  8.75  percent  in January  to 8.35  percent  till  now, a  decline of  only  0.40  percent.

However, a  repo  rate-linked  loan  rate, an  external  benchmark of  the  bank  will  be  more  responsive  to  RBI’s  rate  cuts. An  external  benchmark  is  a  better  tool  for  faster  and  effective  transmission  of  policy  rates. Therefore, it  is  a  better  tool  for  faster  and  effective  transmission  of  the  RBI’s  policy  rate  to  the  end  consumer. This  is  also  a  good  move  from  a  transparency  point  of  view  for  a  home  loan borrower. You  will be knowing  that what  the  rate  of  interest  will  be following  an RBI  action  and  when  it  will  come  into effect.

There  are  some  risks  involved  for the  borrowers  when  opting for the repo  rate-linked  home  loan  as  the changes  in  the interest  rate  of the loan  can  be  more  frequent  and  it  could affect  the  changes  in  the installment  amount  more  often. This frequent  change  in  the  interest rate  is  not  there  in case  of  the MCLR regime  as  there  is  a   reset  clause  in  the  MCLR.

However, the RLLR  home  loan  is  highly  volatile  and  borrowers should be prepared  for  this  type  of  volatility while  going  ahead with  such  a loan. This, however, is  a  risk  most  borrowers already  take  when  they opt  for floating-rate  loans. It will  be very  responsive  to  changes, even more so  than  the  MCLR. The repo rate-linked home  loan  will  transmit rate cuts  in  a  faster and  more  efficient  manner so that  the  end-user can benefit from the  RBI  action.

Ajay Verma

Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.

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