State Bank of India (SBI) is launching a home loan from July 1, 2019, whose interest rate will be linked to the repo rate as set and declared by the Reserve Bank of India (RBI). In addition to the home loans linked to the bank’s base rate and MCLR, the borrowers will now have an option to choose home loans based on the repo linked lending rate (RLLR) of SBI. “All home loan borrowers who want a direct and transparent linkage of their floating rate on home loan to RBI rates may consider this product. We expect more banks to come up with similar products and it is likely that a large part of the new home loan market may move towards this type of rate linkage over the next 12 months,” says Gaurav Gupta, Co-Founder & CEO, MyLoanCare.in.
SBI repo rate linked home loan interest rate – Features
Three main features or the main conditions of this loan are: To be eligible for the SBI repo rate linked home loan interest rate, one needs to have a minimum gross annual income of Rs 6 lakh. While interest is to be serviced monthly as and when applied to the account, a minimum 3 per cent of the principal loan amount should be repaid every year in equated monthly instalments subject to liquidation of loan before borrower attains 70 years. The maximum loan tenure is 33 years over and above maximum moratorium permitted of 2 years for under construction properties. So, the total loan tenor in such cases cannot exceed 35 year.
What led to repo rate linked home loan
Important to note that all lending by the banks since April 1, 2016 are required to be at an interest rate not below its MCLR. Banks cannot lend below its MCLR but may add a mark-up to arrive at the final home loan interest rate. Lending on base rate is not allowed and borrowers on base rate may shift to MCLR based rates of the same bank or continue their loans on base rate.
However, proper transmission of repo rates to the borrower by the banks remained a major concern and banks were found not to pass on the benefit of rate when RBI cut the repo rate but were eager to raise the rates when the repo rate inched upwards.
To address this issue, RBI asked the banks to link home loan rates to an external benchmark rather than linking them to the MCLR, the bank’s internal benchmark. This directive was, however, kept in abeyance by the RBI and banks continued to offer MCLR linked loans. Presently only a few banks offer loans linked to either T-bill rates or repo rate.
SBI’s new benchmark
Meanwhile, from May 1, SBI had already linked savings account, cash credit (CC) and overdraft (OD) rate of interest rate with a balance above Rs 1 lakh to repo rate. The savings account deposit rate for above Rs 1 lakh, will be 2.75 percent below the repo rate which currently is 5.75 per cent. Hence the savings account balance above Rs 1 lakh will carry 3 per cent rate of interest. The effective repo-linked lending rate (RLLR) for CC/ OD will, therefore, be 8 per cent.
Should one consider home loan linked to repo rate or MCLR?
SBI repo rate linked home loan – Interest rate
SBI’s repo rate linked home loan is based on the Repo-Linked Lending Rate (RLLR) which currently is 8 per cent. The effective home loan rate of repo rate linked home loan is between RLLR + 0.40 per cent to RLLR+0.55 per cent based on the risk group. So, the effective SBI repo rate linked home loan interest rate becomes 8.4 per cent to 8.55 per cent.
For loan amount up to Rs 75 lakh , a premium of 20 bps will be charged on the above applicable interest rate if LTV > 80 per cent. For loan amount above Rs 75 lakh, the effective rate of interest will be the RLLR + applicable spread as per risk score.
SBI MCLR based home loan – Interest rate
Currently, the SBI MCLR is 8.45 per cent. The actual home loan interest rate will, however, depend on the amount of loan that you wish to avail, the mark-up on the loan, whether you are salaried or a non-salaried, your gender, your risk group as determined by SBI and lastly on the LTV ratio. 8.7 – 9.25
So, the effective SBI repo rate linked home loan interest rate becomes 8.7 per cent to 9.25 per cent.
MCLR vs repo rate – What to choose
Although the SBI repo rate linked home loan interest rate is between 8.4 per cent to 8.55 per cent, while the SBI MCLR based home loan interest rate is between 8.7 per cent to 9.25 per cent, its better not to compare them at face value. Based on your loan amount, profession etc check the actual rate from SBI on both of these offers specifically on your parameters and then decide.
Any downward movement in the repo rate will keep the burden of interest rate lower either through lower EMIs or lesser tenure. “The new SBI repo rate linked home loan product is targeted towards the faster transmission of policy interest rate changes to end consumers. One should consider this product if one can accept faster and more frequent changes in interest rates,” says Gupta.
Also, remember, the transmission will be quicker in the case of repo rate linked loan and hence any upward movement will impact the borrower negatively. “The product will help borrowers benefit from rate cuts in a transparent manner but may also mean a hefty increase in interest rates in case RBI increases repo rate. In times of turmoil in international markets, sometimes the repo rate is hiked very sharply and this may hurt borrowers though the likelihood of such an event is very limited.,”adds Gupta.