Other than the base rate and MCLR-linked home loans, the largest state-run lender State Bank of India will be launching a new home loan product from July 1 whose interest rate will be linked to the RBI's key repo rate. Repo rate or repurchase rate is the rate at which RBI lends money to commercial banks. In its June monetary policy review meet, the apex bank revised repo rate lower for the third consecutive time by 25 basis points to 5.75%, its lowest level in 9 years, as growth concerns loomed largely.
Here is a breakdown on whether or not the SBI home loan borrower should opt for the new product in the offing:
Features of SBI repo-rate linked home loan:-
Eligibility criteria: To avail SBI repo rate linked home loan, borrowers should have a minimum gross income of Rs. 6 lakh per annum.
Tenure: The maximum tenure of the loan allowed is 33 years over and above the moratorium period of 2 years in case of an under-construction property. So, the repayment period of this loan offer can utmost extend to 35 years.
Principal amount repayment terms: In respect of the repayment of the principal loan amount, a minimum of 3% of the principal amount has to be repaid annually in equated monthly instalments subject to loan settlement before the individual borrower turns of 70 years age.
Why repo linked lending rate (RLLR) based home loans?
To address the issue of proper transmission of repo rate to borrowers, RBI asked banks to link home loans to an external benchmark instead of MCLR or marginal cost of funds based lending rate i.e. the bank's internal benchmark. Notably, since April 1, 2016, all the lending by the banks has to be at a rate not below the MCLR rate though they are allowed to add a mark-up to decide the final interest rate on the loan product.
How SBI’s repo rate linked home loan product will work and interest rate?
The new SBI home loan product in the offing is based on the repo linked lending rate or RLLR which is currently 8%. So, the effective interest rate on repo rate based home loan comes to be between RLLR + 0.4% to RLLR + 0.55% which is decided basis the risk profile of the borrower. Thus, the interest rate for repo linked home loan ranges between 8.4-8.55%.
Further, in cases where the LTV ratio is more than 80% and the loan amount is up to Rs. 75 lakh, to the above-specified interest rate, the bank charges a premium of 20 basis points. One basis point is one-hundredth of a percentage point. And if the loan amount exceeds Rs. 75 lakh, the effective rate of interest will be RLLR plus applicable spread i.e. determined as per the risk score of the borrower.
The interest rate of SBI’s MCLR-based home loans
At present, the marginal cost of funds based lending rate of SBI (MCLR) stands at 8.45%. Nonetheless, the final interest rate on a home loan is determined by a host of other factors, including, gender, salaried or professional class, loan amount, the mark-up on the loan, LTV ratio and the risk profile as assessed by the bank. So, the effective interest rate on MCLR-based home loans ranges between 8.7%- 9.25%.
What should you choose MCLR or repo-rate linked home loans?
Repo rate linked home loan in the present context comes to be cheaper at 8.4-8.55% while MCLR based home loan is priced between 8.7-9.25%. Nonetheless, one should go for the repo rate linked home loan offer only if one is able to adapt to frequent changes in interest rates as the transmission of key policy rates is quicker here. Further, whilst any downward movement in repo rate could be beneficial to a borrower with lower interest rate burden either as lower monthly instalments or lesser repayment tenure, any sharp hike in the RBI's key policy rate at any point of time could prove to be negative for the borrower.