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How to Switch to Repo-Linked Home Loan?

IndianMoney.com Research Team | Posted On Monday, August 26,2019, 03:16 PM

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How to Switch to Repo-Linked Home Loan?

 

 

The State Bank of India launched repo-linked home loans on July 1st 2019. The repo-linked home loan scheme links home loan rates to the repo rates. RBI has cut repo rates from 6.5% to 5.4% in recent times.  This means repo-linked home loans are offered at lower home loan rates. SBI claims to offer the cheapest home loan rates at 8.05%.

Several banks are offering repo-linked home loans. Bank of Baroda, Syndicate Bank, Union Bank of India, Canara Bank and Allahabad Bank are offering repo-linked home loans. Should you switch your MCLR Home Loan to repo-linked home loan scheme?

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How to Switch to Repo-Linked Home Loan?

What is MCLR Home Loan?

The Marginal Cost of Funds based lending rate or MCLR takes into account the marginal cost of funds which includes the rate at which banks raise deposits and also other cost of borrowings. Home loan customers shifted from the base rate to MCLR expecting banks to pass on the benefits of the repo rate cut.

Banks have not transmitted the benefits of repo rate cut to customers of MCLR home loans. RBI has cut the repo rate heavily, but banks are reluctant to pass on the benefits. This has prompted many new borrowers to opt for repo-linked home loans to enjoy lower home loan rates.

See Also: How to Get The Cheapest Home Loan?

Should you Switch from MCLR Home Loan to Repo-Linked Home Loan?

If you are servicing MCLR-linked home loans, don’t rush to switch to repo-linked home loans. Wait for a few months as more banks launch repo-linked home loans. Your current bank may launch a repo-linked home loan.

Do consider costs before switching to repo-linked home loans. If you are switching from MCLR home loan to repo-linked home loan within your own bank, it’s easy. You would just have to calculate interest outgo (Home loan interest saved) after taking into account upfront conversion fees.

If you switch to another bank, take into account processing, valuation and legal fees. Also check the spread the banks are charging over and above the repo-linked lending rate or RLLR.

See Also: Your Home Loan Rate Will Go Down

Why Consider Spread Over RLLR When Switching Home Loans?

Let’s understand this concept through an example. The RLLR or (repo-linked lending rate) of Bank A is less than that of Bank B. What about the spread or margins?

Let’s compare the home loan up to Rs 75 Lakhs.

 

Bank A

Bank B

RLLR

7.65%

8.35%

Margin

0.40%

0.00%

Effective Rate

8.05%

8.35%

Loan Amount (Rs)

50 Lakhs

50 Lakhs

Tenure

25 Years

25 Years

EMI

Rs 38,757

Rs 39,757

Interest

Rs 66.27 Lakhs

Rs 69.27 Lakhs

Savings

Rs 3 Lakhs

 

Use IndianMoney.com Home Loan Calculator to calculate home loan EMIs.

Why Switch to Repo-Linked Home Loan?

The Government and the RBI are complaining that banks are not passing the benefits of lower home loan rates to customers. The reason for this banks say is the high internal cost of funds. The repo-linked home loan would solve this problem.

Just take a look at SBI. RBI cut the repo rate by 35 bps and SBI brought the minimum home loan rate down from 8.4% to 8.05%. This is for both existing and new home loan borrowers. The new SBI home loan rates will reflect from September 1st 2019.

See Also: State Bank of India is all Set to Introduce Repo Linked Home Loan Plans From 1 July

The repo-linked home loan rates are cheaper than MCLR home loans by 25-45 bps. The change in repo-linked lending rate is effective from the following month after which RBI cuts repo rate.

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