State Bank of India, India’s largest lender, has cut home loan interest rates. SBI has reduced the MCLR or Marginal Cost of Funds based Lending Rate by 10 basis points. You will find SBI home loan rates coming down from September 10th.
SBI one-year MCLR will be 8.15% a year from September 10th. This is the 5th consecutive time; SBI has reduced MCLR in FY 2019-20. SBI dominates the home loan market at around 35%. Soon other banks will reduce home loan interest rates.
ICICI Bank is India’s second largest private sector lender. ICICI Bank has cut MCLR by 10 basis points across tenors. (For those who don’t know, one basis point is one-hundredth of a percentage point). ICICI Bank one-year MCLR falls to 8.55% and the overnight MCLR drops to 8.30%. HDFC Bank had cut MCLR by 0.1% across tenors.
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What is MCLR?
The Marginal Cost of Funds based lending rate popularly called MCLR is the minimum rate at which banks can lend. The term marginal means additional. Marginal cost is basically the additional cost the bank incurs to fund the purchase of an asset or make an investment.
Take a look at the different components which make up marginal costs:
See Also: Home Loan Interest Rates Rising
RBI introduced MCLR methodology to fix interest rates way back on April 1st 2016. Under MCLR, banks offer all categories of loans at fixed or floating interest rates.
To get the actual lending rates for loans across categories and tenors, spread is added to MCLR. Banks cannot lend at a rate which is lower than MCLR.
Banks offer the 6-month reset period home loan or the 12-month reset period home loan. Let’s say you had availed a home loan in July 2019 with the 6-month reset period. Now, the RBI has cut the repo rate in August. You would see the effects of the MCLR rate cut only after 6 months or in December 2019.
What do you understand from this? There is a waiting period for you and other borrowers to see the effects of the MCLR rate cut. There is a time period before your home loan EMIs go down.
The MCLR reset period varies across banks. SBI has a home loan reset period of one year and Kotak Mahindra Bank has a reset period of 6 months. If you had availed a home loan from SBI on May 1st 2019, the home loan interest rate would remain unchanged till April 2020.
This is why you must opt for lower reset period home loan. Ideally, go for a 3-month reset period home loan. But, few banks offer this option.
See Also: How to Select the Best Home Loan?
SBI was the first bank in India to offer the repo-linked home loan. This scheme was launched way back on July 1st 2019. Under SBI repo-linked home loan; the home loan interest rates are linked to RBI repo rate. Repo rate currently stands at 5.4%.
SBI repo-linked home loan offers cheapest home loan at 8.05% from September 1st. RBI reduced the repo rate from 5.75% to 5.4% in August and SBI cut repo-linked home loan rates. SBI customers enjoy repo-linked home loan rates. (This is for both current and existing borrowers).
SBI RLLR (repo rate lending rate) is linked to RBI repo rate. The repo rate currently stands at 5.4%. The SBI RLLR is 225 bps over RBI repo rate. SBI RLLR changes automatically as RBI changes the repo rate. SBI RLLR changes in the following month after RBI changes the repo rate.
Now, RBI cut the repo rate in August from 5.75% to 5.4% by 35 bps. SBI RLLR changed from September 1st 2019. SBI repo rate lending rate is fixed at 225 bps above the RBI repo rate.
SBI then adds a spread which depends on borrowers credit score. If you have a good credit score and avail a home loan up to Rs 75 Lakhs, you pay SBI home loan interest rate of 8.05%.
For borrowers with good credit score, SBI charges 8.05%. (SBI RLLR of 7.65% + spread of 40 basis points). This is what the SBI chairman Rajnish Kumar has to say about SBI repo rate-linked home loan. It’s getting good response from customers.
The biggest complaint against banks is they don’t pass on RBI policy rate cuts fully, but are quick to raise home loan rates when RBI raises repo rates. All this would change with SBI repo rate-linked home loan. The repo rate-linked home loan plugs this gap resulting in better transmission and transparency. RLLR home loans are generally 25-45 basis points cheaper than MCLR home loans.
See Also: How To Reduce Home Loan Interest Rates?
If you want to switch between MCLR to RLLR home loan with your own bank, it’s quite easy. You just need to calculate savings on interest outgo after accounting for the upfront conversion fee. SBI has a conversion charge of 0.25% on outstanding home loan amounts. Consider valuation, processing and legal fees before opting for home loan balance transfer.
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