4 things to know before you apply for SBI RLLR or MCLR home loan

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Updated: August 22, 2019 10:00:54 PM

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 of the borrower.

SBI RLLR, RLLR, repo linked lending rate, home loan interest rate, MCLR home loan, MCLR, SBI repo loan, Reset period, RBI,How to choose between MCLR home loan and SBI RLLR loan? Read to find out.

SBI RLLR Vs MCLR home loan: Home loan market is witnessing new and fast changes nowadays for the borrowers. The State Bank of India ( SBI) repo linked lending rate (RLLR) may change the paradigm of the home loan industry. Borrowers, meanwhile, need answers to their fundamental queries. Will MCLR home loan be better than the SBI RLLR home loan? Or, how to choose between MCLR home loan and SBI RLLR loan? For a home loan borrower, will the words – MCLR and RLLR – remain mere abbreviations or will they help in making the decision making easier? Soon, many more banks will start offering RLLR home loans and it remains to be seen if the RBI makes it mandatory for the banks to offer them. MCLR, in that case, which started in April 2019, may see an end. But, till then a home loan borrower has to decide between RLLR and MCLR home loan interest rate.

Here are 4 things to know about SBI RLLR and MCLR home loans and how each of them work:

1. Benchmarking and its impact

MCLR: The cost of funds of banks is reflected in the bank’s MCLR which is declared each month by individual banks. Bigger banks with good current account and savings account deposits typically have lower MCLR compared to newer or smaller banks. MCLR is considered to be an internal benchmark as the bank’s own capability to raise low-cost funds is an important factor in its MCLR. Whenever RBI revises the repo rate, MCLR of banks gets impacted. A cut in repo rate helps banks in lowering MCLR and vice versa.

When it comes to lending, banks are allowed to lend at the MCLR but not below it. The effective home loan interest rate will either be MCLR or a little higher. Currently, 1-year MCLR of most banks is between 8 and 9 per cent. So, for a borrower, if the lender i.e. bank’s MCLR is high or goes up, later on, it will result in higher EMI and interest burden. In nutshell, in an MCLR home loan, bank’s own cost of funds plays a crucial role in determining the interest burden on the borrower.

RLLR: Unlike MCLR, in the case of RLLR home loan, the role of bank’s own cost of funds is not direct. 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.

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2. Impact on EMI

MCLR: In an MCLR linked home loan, there will be one EMI that will remain constant till the outstanding loan amount gets repaid. Typically, in such loans, the interest portion in the initial years is higher than than the principal repaid.

RLLR: 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.

3. Impact on reset period

MCLR: In the MCLR home loan, the reset-period is mostly 12 months while a few banks have a 6-month reset-period too. The EMI gets revised depending on the bank’s MCLR on that date when the loan completes 12/6 months. RBI typically takes a decision on repo rates six times in a year. So, there is no immediate impact of repo rate cuts on home loan EMI every time repo rate gets revised. Effectively, there is a time lag and MCLR loans can be called as fixed-for-a-year loans.

RLLR: 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.

4. How Mark-up differs

MCLR: In an MCLR loan, the banks are allowed to charge a Mark-up, Spread or a margin. Say, the bank’s MCLR is 8.5 per cent, then it may lend at 9 per cent after factoring in 50 basis points of mark-up. Such a Spread may differ depending on the loan amount, loan-to-value, tenure of the loan, risk group or gender of the borrower.

RLLR: 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.

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