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.Home Loan Repo Rate RBI: In its first bi-monthly Monetary Policy Review of 2021-22, the Monetary Policy Committee (MPC) of RBI has kept the repo rate unchanged. However, the expectations are that the interest rate on borrowings may go up in a few months’ time and any further decline has been ruled out.
Country’s largest lender State Bank of India (SBI) has not extended the low rate offer that was available till March 31. The SBI home loan interest rate was starting from 6.70 per cent for loans up to Rs 75 lakh and 6.75 per cent for loans in the range of Rs 75 lakh to Rs 5 crore. But, effective April 1, 2021, the SBI home loan interest rate is 6.95 per cent and upwards depending on the loan amount, gender and the credit profile of the borrower.
SBI has clarified that the original interest rates starting from 6.95% have been restored from April 1, 2021 and as such, there has been no hike in Home Loan Interest Rates by the bank.
But, is this a likely signal that the rates may harden from here?
The RBI’s decision comes at a time when the pick-up in economic growth still remains elusive and the inflation also remains untamed. The policy repo rate continues to stay at 4 percent and the home loan interest rate is around the multi-year low levels as most banks are currently offering home loans at interest rates around 7 per cent.
MCLR Vs RLLR home loans
The Marginal Cost of Funds based Lending Rate (MCLR) was introduced from April 2016. 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.
Home loan strategy in 2021
Your home loan strategy in 2021 will depend on what type of home loan you are servicing – Is it based on Marginal Cost of Funds based Lending Rate (MCLR) or based on Repo Linked Lending Rate (RLLR)?
Existing borrowers who have already taken a loan taken before October 1, 2019, may continue with their loans linked to Marginal Cost of Funds based Lending Rate (MCLR) and not switch to Repo Linked Lending Rate (RLLR). The MCLR loans can be switched to RLLR but one should carefully evaluate the cost-benefit before doing so. This may incur a cost and hence consider the remaining tenure of the loan before taking this step. Before switching, one may wait for a few more months to get a clear picture of the interest rate movement. 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.
New borrowers who need a loan now will have to take it as per the bank’s RLLR. Some banks call it an external benchmark rate (EBR). 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 an 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 Bank and HDFC, Kotak Mahindra bank etc.
Lowering interest cost
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 ( On 200 basis points fall) will be:
EMI Saved – Rs 4758 ( Annually Rs 57,000)
Total interest saved – Rs 8.5 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.
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 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, lower will be the interest burden for you.
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