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

SBI launched repo rate-linked home loan (RLLR).
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. SBI  launched  repo  rate-linked  home  loan  (RLLR), an  external  benchmark  of  the  bank, effective  01  July. 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). 

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.

Also read: Home Loans Get Cheaper With New Lending Rate Structure

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.


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


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