State Bank of India (SBI) is going to introduce repo linked home loan product from July 1, 2019. The move seems to be in line with the RBI ‘s direction to the banks to link home loans to an external benchmark. The movement in the repo rate did not reflect in the movement of the lending rates and this had made RBI announce that the lending rates of the banks should be linked to an external benchmark as against the practice of using Marginal Cost of Funds based Lending Rate (MCLR), which is the bank’s internal benchmark.
This, however, didn’t materialize and RBI had to keep the directive in abeyance till further notice. Only a few banks do have home loans linked to an extremal benchmark and the SBI is the latest entrant in that space.
From April 1, 2016 all banks have been asked to link all their loans including home loans to the bank’s MCLR. Interestingly, only banks are supposed to declare and link home loan to their MCLR, while the NBFC’s and other lenders are not required to do so and may fix the home loan rate based on their own cost of funds.
In May, SBI had reduced its MCLR by 5 bps across all tenors with 1 Year MCLR coming down from 8.50 per cent p.a. to 8.45 per cent p.a. As a result, Interest rates on all loans linked to MCLR stand reduced by 5 bps with effect from 10th May 2019.
What to do
As a borrower, remember that when RBI brings about a change in the repo rate, if the loan is linked to MCLR, there may not be any immediate impact on your EMI in the same or next month. The EMI will be reset after 6 or 12 months as per the contract. However, if the loan is linked to the repo rate, the transmission may be quicker. In times of rising interest rates, such loans linked to repo rate may hurt while in a falling interest rate scenario, borrowers seem to stand at an advantage. Keep watching this space, we will help you decode the repo rate home loans better.