To transmit the benefit of repo-rate cuts to the general public, many government banks, including the nation’s largest financial institution, the State Bank of India, have introduced a new home loan product referred to as a repo-rate linked home loan. 99acres decodes the term and shares various pros and cons associated with it.
By definition, a repo-rate linked home loan is a loan where the rate of interest is levied in tandem with the repo rate decided by the Reserve Bank of India (RBI). Here, the interest paid on the home loan is subject to the variations in the repo rate. For instance, if the repo rate is reduced by 0.30 basis points (bps), the interest paid by the homebuyer would also be decreased by 0.30 bps, which was not the case earlier.
Previously, under floating rate of interest, banks had only one option, i.e. Marginal Cost of Funds-Based Lending Rate (MCLR). Moreover, banks determined the rate of interest levied on the principal amount depending upon the remaining tenure for the loan repayment and the risk associated with the recovery. Resultantly, the final benefits of the repo rate cuts were not passed onto the homebuyers. Besides, the MCLR rates varied across banks, and the process of calculation largely remained opaque and complex. On the contrary, the repo-rate linked home loan ensures transparency and has been touted as a pro-investor move.
Key features of repo-rate linked home loan
It is crucial to understand that the repo-rate linked home loan is not the repo-rate itself; instead, it is based on it. For instance, if the repo-rate is 5.75 percent, the credit would not be available at this rate; banks will add a base spread, and a risk base spread over the repo rate. In case of SBI, the current Repo Linked Lending Rate (RLLR) is 225 bps over the repo rate. Besides, the bank levies 40 bps to 55 bps risk spread depending upon the credit score of the borrower. Thus, the home loan lending rates in SBI currently vary from 8.40 percent to 8.55 percent. The RBI recently slashed the repo rate by 0.35 bps, bringing it down to 5.4 percent. Post this, the new RLLR of SBI is expected to be brought down to 7.65 percent from September 1, 2019.
The RLLR directly benefit from the repo-rate cut, unlike MCLR, where banks determine the final benefit shared by the homebuyers.
EMI disbursements in RLLR differ from the conventional home loan EMIs. “In RLLR, along with the basic EMIs, the borrower also has to repay a minimum of three percent of the principal amount every year before he attains the age of 70. Though the arrangement poses an additional burden on the buyer, it is still a better choice over MCLR since the principal decreases by three percent every year, which further reduces the interest levied and the final payout.
The maximum tenure of Repo rate-linked home loan is 33 years. However, in the case of under-construction properties, two years moratorium has been allowed because of project delays. Typically, a moratorium is a legal authorisation to debtors to postpone the payment. However, the interest levied during the moratorium period has to be serviced monthly. For ready-to-move properties, the EMIs begin immediately a month after the loan disbursement.
Investor or end-user: Whom would RLLR suit?
Since RLLR is based on repo rate, it is bound to experience fluctuations. While the option may seem attractive when the repo rate is falling, it can be challenging in a vice-versa situation. Thus, RLLR may be more suitable for the investor community than first-time homebuyers.
Also, there is no provision to switch MCLR-linked home loan to RLLR, which implies that the latter facility is available only for new homebuyers. Buyers with ongoing home loans are not allowed to avail the product. Thus, it remains to be seen if any such change will be proposed anytime soon or not.