India’s largest public sector bank, State Bank of India (SBI), has launched a new home loan product whose interest rates will be linked to the repo rate fixed by the Reserve Bank of India (RBI). The repo rate is the lending key rate at which the RBI lends to commercial banks. The scheme will be available from July 1.
In December 2018, at its bi-monthly policy review, the RBI had announced that banks must link their loan rates to external benchmarks. The RBI had provided them four options: the repo rate, the 91 day or 182 day Treasury Bill yield, or any other benchmark produced by the FBIL. The external benchmarking was to begin from April 1. However, banks have asked for more time. SBI so far is the only bank that has picked the repo rate as its benchmark.
The Reserve Bank of India earlier this month had reduced the repo rate by 25 basis points, bringing it to 5.75%. The central bank has also said that it will ensure higher and faster transmission of rate cut benefits to the customers. Despite three continuous rate cuts by the RBI, banks have transmitted only a fraction to the customers.
SBI has clarified that customers coming to them for a home loan can explore both MCLR-linked home loan rates as well as repo rate-linked home loan rates. In case you choose either one of them, here is what it means for you.
What MCLR-Linked Home Loan Rate Means For You
Since 2016, bank loans with floating interest rates are linked to the marginal cost of fund-based lending rate (MCLR). MCLR-linked loans have fixed interest rate reset dates – for example, once every six months – on which the loan’s interest rate would automatically reset as per the bank’s prevalent rate at the time. However, the RBI has noted that banks aren’t transmitting the rate cuts efficiently to customers.In case your bank doesn’t transmit the RBI-mandated cuts to you, you could consider such options as requesting your bank to lower the rate or transferring your loan to another bank offering a lower rate.
What Repo-Rate Linked Home Loan Means For You
The new scheme is expected to be more transparently priced in terms of interest, and be more dynamic in responding to repo rate fluctuations. In it, the loan is benchmarked to the Repo-Linked Lending Rate (RLLR), which is currently 8.00%. It is calculated as the repo rate (currently 5.75%) plus 2.25% over which the bank will apply a spread which ranges from 40 to 55 basis points, depending on the borrower’s income and credit profile. The RLLR is expected to reduce the borrower’s wait for rate cuts as any fall in the repo rate will automatically lower the RLLR, thus reducing the loan interest rate by that muchOn the other hand, a rise in the repo rate would make home loans expensive. Simply, a change in the repo rate will have a direct impact on your repo-rate linked home loans.
Who Is Eligible For This Loan?
You are only eligible to avail this loan from July 1 if your minimum annual income is ₹6 lakh. You can avail this loan for a maximum tenure of 35 years. You will also have to repay at least 3% of the principal or outstanding loan amount annually.
The bank has also reduced the interest rate on a cash credit account (CC) and overdraft (OD) customers with limits above ₹ 1 lakh. The bank on May 1 had linked its savings account deposit and cash credit and overdraft to the repo rate.
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