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.
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, 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.