Earlier, the lending used to be on Base Rate of banks while from April 2016, the industry moved on to the MCLR linked loans.
Addressing a press conference on Friday, Union Minister of Finance Nirmala Sitharaman spoke about steps to be taken by the banks for effective transmission of repo rate cuts to the home loan and car loan borrowers. Often in the past, it has been seen that there is a time-lag and not a complete transmission of the repo rate cut by the banks to the loan borrowers. Earlier, the lending used to be on the Base Rate of banks while from April 2016, the industry moved on to the MCLR-linked loans. Both, Base Rate and MCLR are internal benchmarks of banks based primarily on their own cost of funds.
Now, it seems a new structure will be in place wherein lending will be based on an external benchmark such as the RBI repo rate. The home loan in such a case will be called repo rate-linked loan (RLLR). SBI has already launched its RLLR loan and a few other banks have also announced their RLLR loans.
In an RLLR loan, any revision in the repo rate by the RBI will be transmitted immediately and in entirety. It, however, is a double-edged sword – any uptick in the repo rate will also hurt the borrowers from the very next month.
Here are five features of an RLLR loan to consider before applying for it:
Unlike MCLR, in the case of RLLR home loan, the bank’s own cost of funds will not be of much importance as far as benchmarking is concerned. The home loan interest rate in RLLR home loans will be linked to the bank’s RLLR. The RLLR, in turn, will depend on the RBI’s repo rate. Whenever RBI revises the repo rate, RLLR of the bank gets impacted. A cut in repo rate helps banks in lowering RLLR and vice versa. RLLR, therefore, is an external benchmark.
In an RLLR loan, the principal portion will remain the same all through the tenure, however, the interest portion will vary. In SBI RLLR loan, a minimum of 3 per cent of principal loan amount needs to be paid each year equated in monthly instalments subject to liquidation of the loan before borrower attains 70 years. The actual principal repayment will depend on loan tenure and amount.
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3. Re-set date
In RLLR home loan, the impact of any revision in repo rate is immediate. A cut in repo rate will result in savings in interest while a rise in the repo will hurt. For SBI, the RLLR gets revised from the 1st of the following month.
As of now in the SBI RLLR, the Spread is as per the loan amount and risk group of the borrower. Effective September 1, SBI RLLR is 7.65 per cent and the spread is between 40 basis points and 110 basis points depending on the loan amount and risk group.
5. Principal- Interest ratio
Principal repayments are higher in the initial years unlike in a regular MCLR linked loan where the interest portion is high and then tapers off over the course of the loan.
To sum up
In times, when the interest rate is on the way down, RLLR will suit borrowers but when policy rates start to rise, the borrowers need to be ready for that. As the principal repayments are higher during initial years in RLLR, this mode of lending may end up as a long-awaited relief for the borrowers. Unless, of course, the policy rates take a sharp u-turn and move upwards.