Those who are opting for a home loan to make a purchase should keep in mind that the home loan interest rate may undergo a reset from time to time. Now the idea of a Floating Rate for home loans itself has undergone a change. The users may have the option to link the home loan to either the repo rate or the MCLR. On the 1st of July, 2019, the State Bank of India launched the repo rate linked to the home loan.
Until now, all the floating rate loans that SBI offered were linked to marginal cost of fund based lending rate or the MCLR. As mentioned earlier, one will have the option to link it to the repo rate or the MCLR. There have been instances before where the home loans have been linked to some kind of an external benchmark. Citibank India had launched product where the home loan was linked to treasury bills on a three month basis. In 2005, IngVyasa Bank had launched home loan product which was linked to Mumbai Interbank Offer Rate. However, it is a very new concept to link home loan rates to the repo rates and here are some things to know about it.
What will be the scenario down the line?
The thing to ponder here is that while the home loans will be linked to the repo rate, one will not get the loan at the repo rate. Repo rate is the key policy rate at which the central bank loans money to the commercial banks and currently it stands at 5.75%. But this is not the rate at which one will get the loan. The home loan that is linked to the repo rate is actually the rate linked lending rate or the RLLR, which is a rate linked with repo and that has a margin of 2.25%. So, the RLLR at present stands at 8% and there is a spread above the RLLR that is 40 to 55 basis points or bps. One bps is one- hundredth of a percentage point and the loan will be available at 8.4% to 8.55% per annum, for a loan of up to Rs 75 lakhs. For those who have a loan that is linked to MCLR, the loan will be available at an interest rate f 8.55% to 9.10% depending on external factors like employment status and gender. There will be a 15 bps difference on a loan of Rs 30 lakhs for a 20 year tenure with a savings of about Rs 70,000.
Also, it is important to note that the bank has put a cap of Rs 6 lakhs per annum for individuals who are seeking to avail the repo rate linked loan. For those who have the loan to value or LTV is more than 80%, the lender will be charged 20 bps higher in terms of interest rate. The bank is also going to take into account the credit score while giving the loan and the interest will automatically increase of the score is strong. During repayment, one has to pay a minimum of 3% of the principal loan amount every year with EMIs.
There are also chances that the interest is also going to be volatile. Unlike the MCLR, which most has a reset clause for one year to six months, the impact of the change can be seen immediately on the loan rate in case there is any change in the repo rate. However, one does have the option to leave the EMI constant and the tenure can be increased or decrease depending on the loan rate. In case one is not comfortable with the repo rate linked home loan, the bank is also giving the option to switch back to MCLR linked home loan. It is a good idea to kind of weigh the pros and cons of both kind of home loans and also have a thorough understanding of one’s own income, expenditure and repayment capabilities and then choose the loan interest rate as this would have long term implications and you would not want your home loan to become a liability.