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.
The Monetary Policy Committee (MPC) of RBI, in its second bi-monthly Monetary Policy Review of 2021-22 has kept the repo rate unchanged at 4 per cent. For home loan seekers, the RBI’s repo rate is an important yardstick to keep an eye on. 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 and are called Repo Linked Lending Rate (RLLR). 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. There may not be a big impact on the home loan interest rate even though going forward, the MCLR may see a minor fall with some banks.
New borrowers who are looking for a home loan will have to take it as per the bank’s Repo Linked Lending Rate (RLLR). Some banks call it an external benchmark lending rate (EBLR). The banks, however, may not offer loans on their RLLR but depending on the loan amount and other factors, the effective rate may differ.
Currently, home loan interest rate across most banks and NBFCs is around 7 per cent and is at a multi-year low level. Based on the loan amount, profession, gender etc, the actual home loan interest rate may vary. The EMI will depend on the home loan amount, interest rate and the tenure of the loan.
Since, the repo rate has remained unchanged for a few months now, the RLLR also remains the same for most banks. Some of the banks that a new borrower may explore for the best home loan interest rate include SBI, LIC Housing Finance, ICICI Bank and HDFC, Kotak Mahindra bank etc.
Existing borrowers who have already taken a loan taken before October 1, 2019 and have loans loans linked to Marginal Cost of Funds based Lending Rate (MCLR) have the option to switch to Repo Linked Lending Rate (RLLR) loans.
PNB has recently reduced the 1-year MCLR by 0.05 percent to 7.30 percent. There has no change in Base rate (presently 8.65%) and RLLR (presently 6.80%) for the bank.
By lowering home loan interest rate by even one per cent or by choosing a lender with low rate, the EMI and the total interest burden falls. Choose a lender that offers a low rate of interest based on your profile. 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.
Even a 100 basis points reduction can help you to save a few lakh in interest cost, depending on the remaining tenure of the loan. Assuming a home loan of Rs 40 lakh for 15 years, the savings in EMI and interest will be:
EMI Saved – Annually Rs 27,000
Total interest saved – Rs 4.15 lakh
Another way to keep the interest burden low is to keep prepaying principal on regular intervals. It is better to prepay every 6 months or on an annual basis so that the outstanding principal amount comes down much early. Any such prepayments should ideally be done in the initial stages of the loan as interest cost is more during the first few years of the loan. You may use a home loan repayment calculator to know how much will be the savings.
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. As and when the repo rate goes up, the borrowers paying EMI on loans linked to RLLR will be impacted much quicker than those loans linked to MCLR. Therefore, remember, whether it’s 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, the lower will be the interest burden for you.