You have worked so hard and collected money for the dream house. Why pay all the hard earned money to the bank in interest? Planning to take a home loan? Why not get it at lower home loan interest rates?
RBI wants to make your home loan cheap. It has cut the repo rate 4 times this year. It recently cut repo rate by 35 bps to 5.4%. What is the repo rate? Repo rate is the rate at which RBI lends to commercial banks if there is a shortfall in funds. If RBI cuts the repo rate, banks can borrow at much lower interest rates. The commercial banks are expected to transmit the lower rates to customers by cutting home loan rates.
Many people have a problem with banks. Banks are quick to raise home loan interest rates when RBI raises repo rate. But, they don’t cut home loan interest rates when RBI cuts the repo rate. Even the Prime Minister Narendra Modi has asked banks to pass on rate cut benefits.
Now, some banks have introduced a new product: Home Loan linked to repo linked lending rate or RLLR. SBI the largest lender in India has introduced SBI Repo-Rate linked home loan. SBI was the first bank to introduce the home loan product linked to the repo rate. Now, more public sector banks like Syndicate Bank, Bank of India, Union Bank, Bank of Baroda and Allahabad Bank have announced linking the lending and deposit rates to the RBI repo rate.
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See Also: Home Loan Interest Rates
This is a home loan scheme which links interest rates to an external benchmark; the RBI repo rate. RBI had a major problem with banks. They were not transmitting the benefits of repo rate cut to customers. Banks were not cutting your home loan rates.
The SBI one-year MCLR rates in October 2018 were 8.5% and in August 2019 it was 8.25%. ICICI Bank one-year MCLR stayed unchanged at 8.65% from October 2018 to August 2019.
In the same time, RBI cut repo rate from 6.5% to 5.4%. Banks have not passed lower home loan rates to customers. Avail repo-linked home loans, to enjoy lower home loan rates.
SBI had introduced repo rate-linked home loan on July 1st. SBI repo-rate linked home loan will carry the RLLR (repo-linked lending rate). So how does this work?
The repo rate was 5.75% in July:
SBI charges a base spread of 2.25% above the repo rate. This works out to be: 5.75% + 2.25% = 8%.
SBI then segregates customers based on risk score as assessed by the bank. If you are bracketed in RG 1,2,3 you are charged 40 bps. You are charged 55 bps on being bracketed in RG 4, 5 or 6. Your applicable home loan rate is 8.4% to 8.55%.
You pay a home loan interest rate of 8.4-8.55% for a SBI home loan of Rs 75 Lakhs. You need to earn at least Rs 6 Lakhs a year to be eligible for SBI repo rate-linked home loan. Existing borrowers can switch to SBI repo rate-linked home loan after paying a conversion fee of 0.25%. The maximum tenure is 33 years. SBI would charge a premium of 20 bps on interest rate if loan-to-value ratio is more than 80%.
The loan linked to repo rates is 10-30 bps lower than MCLR linked home loans. This helps save on home loan rates. RBI could cut repo rate by 50 bps over the next one year.
Final Take: If you are able to withstand volatility in home loan rates; apply for repo rate-linked home loans.
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