Borrowers of repo-linked home loans are able to benefit from the cut in interest rates from the month after the RBI’s monetary policy announcement
Here’s a home loan scheme that links interest rates to an external benchmark, the repo—set and declared by the Reserve Bank of India (RBI) in its bi-monthly monetary policy review. State Bank of India (SBI) was the first public sector bank to launch a repo-rate linked home loan scheme, effective July 2019. So, in case of a change in policy repo rate, the repo linked lending rate changes from first day of the following month, which is a very effective move for borrowers.
Following SBI’s steps, Bank of Baroda qlso initiated a repo-rate linked home loan scheme from August 12. Other public sector banks are likely to follow the trail soon.
Why offer a repo rate linked home loan?
Transmission of rates was a major concern by the RBI. The banks were not passing the benefit of rate cut by RBI to borrowers. For instance, the one-year MCLR rates offered by SBI in October 2018 and August 2019 were 8.5 per cent and 8.25 per cent, respectively. Similarly, ICICI Bank’s one-year MCLR remained unchanged at 8.65 per cent from October 2018 to August 2019.
However, in this period, the repo rate has been cut from 6.5 per cent to 5.4 per cent by the RBI. Clearly, banks have been slow in passing the benefits of rate cuts to borrowers.
In the December 2018 monetary policy meet, the RBI asked banks to link all floating rate retail loan products to external benchmarks starting April 2019.
The RBI had stated that banks should benchmark the rates to either the RBI policy repo rate or Government of India’s 91-day or 182-day Treasury bill yields as developed by the Financial Benchmarks India Private Ltd (FBIL) or any other external benchmark developed by the FBIL.
However, during the consultations with the RBI, several banks opposed the decision of linking lending rates to an external benchmark, indicating that their cost of funds was not linked to those external benchmarks and delayed the implementation indefinitely. However, there is still no official announcement on this development from the RBI. Even so, a couple of banks have introduced the repo rate linked home loan scheme.
What is it about?
Earlier, floating rate home loan borrowers had only one option—loans linked to marginal cost of fund based lending rate (MCLR). But now, they can take a home loan linked to the repo rate or MCLR.
To be eligible for the SBI repo rate linked home loan scheme, the borrower should have minimum annual income of Rs 6 lakh. The tenure of the loan is up to 33 years. In the case of under-construction projects, the maximum moratorium period up to two years is offered over and above maximum loan tenor of 33 years. So, in such cases the total loan tenure cannot exceed 35 years.
In this home loan scheme, the borrower needs to repay a minimum of 3 per cent of the principal loan amount every year in equated monthly installments. If you take a home loan of Rs 50 lakh, you need to repay a minimum of Rs 1.50 lakh as principal plus the interest cost every year.
The interest rates in this scheme are not directly linked with the repo rate figure announced by the RBI. The loan rate is 2.25 percentage points above the repo rate. On July 1, the repo rate was 5.75 per cent, so repo-linked lending rate is 8 per cent (2.25 + 5.75). But, the repo-linked lending rate may change effective September 1 as we had a repo rate cut of 35 basis points (bps) announced by the RBI this month. Hundred basis points equal one percentage point.
At present, we will take the repo-linked lending rate as 8 per cent. Over and above the repo-linked lending rate, these banks maintain a spread of 40 bps to 55 bps. So, the effective rate for home loans up to Rs 75 lakh ranges from 8.4 per cent to 8.55 per cent. The bank charges a premium of 20 bps on the interest rate if the loan-to-value ratio is more than 80 per cent. For home loans above Rs 75 lakh, the effective rate is 8.95 per cent to 9.10 per cent (i.e. spread of 95 bps and 110 bps on repo linked lending rate of 8 per cent). Effective August 10, home loan rates linked to MCLR would be 8.6 per cent to 8.85 per cent at SBI, which is more than the repo-linked rate.
Similarly, for Bank of Baroda MCLR linked home loan rate starts at 8.45 per cent, while the repo-linked rate starts at 8.35 per cent. At present it’s 5 bps cheaper than SBI’s repo-linked home loan scheme.
Apart from interest rates, there are additional costs for borrowers opting for a repo-linked home loan scheme. For instance, SBI charges a processing fees of 0.35 per cent of the loan amount plus service tax. The minimum fees will be Rs 2,000 and the maximum is Rs 10,000 plus service taxes. These charges may vary with banks.
