SBI (State Bank of India) has reportedly confirmed the introduction of a home loan product that will be tied to the repo rate from the 1st of July, 2019. The bank has stated that home loans that will be offered likewise to customers will be priced at approximately 2.65% more than the repo rate which currently stands at 5.75%. As a result, home loan interest rates will be 8.40% overall. At present, SBI home loans are tied to the MCLR (Marginal Cost of Funds Based Lending Rate) which stands at 8.55%.
Is this good news for customers? Some would definitely think so. What everybody would agree on is that this new product ushers in a whole new era of innovation in terms of financial products and may also help in transmitting repo rate cut benefits faster to the end customer, something that was a major grouse earlier. SBI has already stated that the advantages of the repo rate cut to 5.75% from 6% by the RBI (Reserve Bank of India) will be transmitted fully to overdraft or cash credit customers with immediate effect from the 1st of July, 2019. The RLLR (repo-linked lending rate) for these customers is now 8%.
More information on this uniquely designed home loan product
Rushing to apply at SBI? That’s great but you should hold your horses and understand more about the product in question. Here are some of the key aspects worth keeping in mind:
- The home loan product will be effective from the 1st of July, 2019.
- The interest rate will be tied to the repo rate which will be set periodically by the RBI as always.
- Customers can now select between home loans tied to the MCLR and to the repo linked lending rate or RLLR at State Bank of India along with home loans tied to the base rate.
- Borrowers who desire direct transmission of RBI policy rate changes to their floating home loan interest rates will naturally be interested in this unique SBI home loan offering as per experts.
- Several other banks are expected to follow suit in terms of launching similar financial products, thereby giving customers a choice between rates linked to the repo rate and the MCLR.
- A major portion of the home loan sector may be switching towards these offerings over the next year or so as per reports.
- Customers willing to apply for home loans linked to the repo rate at SBI have to earn at least Rs. 6 lakh annually (gross income).
- Interest is to be repaid on a monthly basis as and when applicable for the home loan account.
- A minimum threshold of 3% of the home loan principal amount has to be repaid annually in EMIs which is subject to the liquidation of the home loan prior to the borrower turning 70.
- The maximum tenor for the loan is 33 years which is over and above the moratorium period (maximum) of two years in case of properties which are under construction.
- The maximum tenor can thus be 35 years.
- RBI has previously asked banks to tie home loan interest rates to any external benchmark although banks retained the MCLR system for working out home loan interest rates.
Other SBI developments
From the 1st of May, 2019, SBI had already tied its CC (cash credit), savings account and OD (overdraft) interest rate with balances over Rs. 1 lakh to the repo rate. The savings account deposit rate for balances more than Rs. 1 lakh will be 2.75% lower as compared to the repo rate which is currently at 5.75%. As a result, just 3% interest rate will be earned on these accounts. The repo linked lending rate or RLLR for the OD/CC accounts will stand at 8% as per reports.
Should you opt for this home loan product?
The current RLLR at SBI is 8% and the bank will charge a spread of 0.40%-0.55% for the borrower depending on the overall risk profile. As a result, home loan interest rates with this new product will hover between 8.40-8.55%. In case of loan amounts till Rs. 75 lakh, a 20 basis points premium will be charged on the rate of interest applicable in case the loan to value (LTV) ratio is lower than 80%. For loan amounts exceeding Rs. 75 lakh, the rate of interest effective will be the RLLR plus spread that is applicable depending on the applicant’s risk score.
The SBI MCLR currently stands at 8.45% and the actual rate of interest on the home loan will be dependent on the loan amount to be availed and the mark-up for the same and also the customer type (salaried/non-salaried), gender, the risk group and also the LTV ratio. The effective rate of interest thus goes up to 8.7-9.25%. You should not be making just a direct comparison of the MCLR and repo rate linked home loan interest rate. Any cut in repo rates will lower your overall interest outgo and EMIs and the new product will ensure swifter transmission of policy rate changes to customers.
If you are okay with swifter chances and fluctuations in rates of interest, then you can consider this new product. The transmission of repo rate can affect the borrower in case the repo rate is increased. This will lead to higher EMIs and interest outgo alike. You should decide on the basis of your own preferences, i.e. whether you want a more stable interest rate or whether you are comfortable with frequent changes.