The State Bank of India (SBI) rolled out its repo-linked lending rate (RLLR) home loan in July. While some banks have followed suit, other public sector banks (PSBs) have announced their plans to launch RLLR-linked home loans soon. So, let’s clear the concept before switching to RLLR home loans.
What is Repo Linked Home Loans?
Repo linked lending rate(RLLR) is the lending rate which is linked to the RBI’s repo rate. However, the RLLR interest rate depends on multiple factors. The RLLR-linked home loan interest rate depends on several factors such as the loan amount, the loan-to-value of the loan and even the risk group of the borrower, amongst other things. There can be Spread or Margin charged by the bank. A bank may have an RLLR of 6.5 per cent, but the actual home loan interest rate could be 7.5 per cent, of which 1 per cent will be the Spread or Margin of the bank. Banks are free to fix Margin while lending to the loan borrowers.
In an RLLR loan, there are two payments that are to be made separately. One, for the principal repayment and other for the interest payment. For RLLR loan, the principal loan amount is divided by tenure to know the equated monthly principal (EMP). This comes to Rs 27,778 in the example under consideration, and it will remain the same throughout the loan term. In RLLR home loan, the interest payments will vary each month, they will be the highest in the first month and then keep falling.
How does repo linked home loan work?
When banks borrow funds from the RBI, it is at the repo rate. Lowering of repo rate by the RBI makes banks lend at a lower rate. Therefore, in the case of lending based on RLLR, the interest rate on home loans will fluctuate as per the movement in the repo rate. The RBI’s repo rate shows 5.35 per cent and is cut by 35 basis points to settle at 5 per cent, the RLLR of all banks, having repo rate as the external benchmark, will also get deducted by 35 basis points.
Switching to repo linked home loan
The banks have failed to pass on the RBI’s policy rate cuts for a long time, but have been quick to raise rates when the reverse happens. The common reason given by banks for this is the higher internal cost of funds. RLLR will fill this gap for better transmission and transparency. This is already obvious going by the RLLR-based home loan rates announced so far. For instance, a 35 bps repo rate cut will result in a comparable reduction in SBI’s RLLR-based home loan rate. From its minimum rate of 8.4%, it will come down further to 8.05% for both new and existing SBI borrowers, depending on their risk profiles and loan slabs.
Considering that the RLLR home loans are 25-45 bps cheaper than MCLR-linked loans, existing borrowers will gain substantially. The change in RLLR will be effective from the first day of the following month in which the repo rate gets changed. So, for SBI customers, the new lowered rates will reflect from 1 September.
Repo linked home loan updates
If you are servicing a home loan, experts say that you should wait for a few months before making a decision about your existing MCLR-linked loans. RLLR is being adopted by banks gradually. Hold on for a month or two and then evaluate the options. Your existing bank may soon launch a product, saving you the hassle and cost of switching to another bank.
Once you have ample choice, do your homework before making the switch as there are costs to consider. If you make up your mind on switching to RLLR within your existing bank, the task is relatively easy. You only need to calculate savings on interest outgo after factoring in the upfront conversion fee.
However, if you intend to switch to another bank because you are unhappy with your existing bank’s rates, there are other charges like processing, valuation and legal fees that you will have to shell out. More importantly, check for the spread that the other banks are charging over and above the RLLR. “Consider the impact of margin (spread) between RLLR and the final rate offered. Go with the bank that offers the narrowest spread as it will reflect the RBI’s policy rates more closely,” advises Patel. This is particularly true for higher-value loans.
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