As RBI keeps the repo rate unchanged, it remains to be seen how the borrowers will benefit provided the banks' MCLR or RLLR comes down over the next few months.
Since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI repo rate.
As was widely expected, the Reserve Bank of India (RBI) kept the repo rate constant at 4 per cent in its December 2020 monetary policy today. It remains to be seen how the borrowers will benefit provided the banks’ MCLR or RLLR comes down over the next few months. While any fall in Marginal Cost of Funds based Lending Rate (MCLR) will help those borrowers who have their loans linked to it and their re-set date is nearing, the reduction in Repo Linked Lending Rate (RLLR) will help new borrowers to take loans at a lower rate of interest.
New borrowers who need a loan now will have to take it as per the bank’s RLLR. The banks, however, may not offer loans on their RLLR but depending on the loan amount and other factors, the effective rate may differ. On average, for the majority of borrowers based on the loan amount, profession, gender etc, the home loan interest rate is 7 per cent or even higher across most banks. Some of the banks that a new borrower may explore for the best home loan interest rate includes SBI, LIC Housing Finance, ICICI and HDFC.
If you are a borrower with a loan linked to Marginal Cost of Funds based Lending Rate (MCLR), the fall in MCLR will help you pay lower EMIs on your loan as and when your reset-period comes up. Let us see how a 100 basis points or 1 per cent cut in home loan interest rate impacts your EMI and total interest cost.
Assuming a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest ( On 100 basis points fall) will be:
Since April 2016, when the Marginal Cost of Funds based Lending Rate (MCLR) was introduced, the 1-year MCLR has fallen by nearly 200 basis points. Among other factors, the MCLR is based on the bank’s own cost of funds.
However, since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI repo rate. Every time, RBI revises the repo rate, the revision in the interest rate is much quicker for the borrower compared to the loans linked to MCLR.
What to do
New borrowers may explore 2-3 lenders and ask for the effective home loan interest rate based on their loan amount, gender and period of the loan. Those who have their loan based on MCLR may ask the banker to switch their loan to RLLR based lending. This may incur a cost and hence consider the remaining tenure of the loan before taking this step. But remember, whether its MCLR or RLLR home loan, keep a prepayment plan handy to repay the loan amount as early as possible. The early you repay the loan, lower will be the interest burden for you.