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Good News for Home Loan Borrowers! Big savings in interest cost from October 1

Sunil Dhawan
RLLR home loan, repo-linked home loan, repo-linked lending rate, RLLR, SBI RLLR home loan , RLLR vs MCLR, home loan, Marginal Cost of Funds based Lending Rate , MCLR, MCLR home loans, MCLR linked home loans, emi , borrowers

Repo-Linked Home Loan: The good news for home loan borrowers is finally in. The Reserve Bank of India (RBI) has asked banks to mandatorily extend loans to borrowers at an interest rate which is based on an external benchmark. From October 1, 2019, all new floating rate personal or retail loans such as housing loan or auto loans, including floating rate loans to Micro and Small Enterprises, will be benchmarked to an external factor which could be the RBI repo rate, amongst others. State Bank of India (SBI) was the first bank to launch a repo-linked lending rate (RLLR) home loan, subsequently, several other banks have already launched similar repo-linked lending rate product.

The move is expected to help borrowers reduce the interest cost in servicing their loans as compared to loans in the existing regime which is based on Marginal Cost of Funds based Lending Rate (MCLR). For those who are still paying the home loan EMIs on the erstwhile Base Rate or the present regime of MCLR based loans can switch to RLLR linked home loan after October 1. However, a reverse switch to either Base Rate or MCLR will not be possible.

RLLR vs MCLR

SBI RLLR home loan is a relatively new product while MCLR home loans are there in the market since April 1 2016. As other banks introduce RLLR loans, the modalities could be different from each other which may make the comparison between MCLR and RLLR home loan much difficult.

In both, RLLR home loan and MCLR loan, the effective home loan interest for the borrower may not be the actual RLLR or MCLR of the bank. There could be a Mark-Up or a Spread in both MCLR and RLLR home loans. For example, a bank’s RLLR could be 7.8 but after a Mark-up, the effective home loan interest could be 8 per cent. Similarly, a bank’s MCLR could be 8 per cent, while it may lend at 8.2 per cent.

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Is RLLR home loan better

Using figures, let us see the differences between the two, how EMI differs, how much interest burden differs and how much lower is the interest cost in RLLR loans.

In our example below, for a fair comparison, we consider the effective home loan interest as 8.5 per cent under both scenario-RLLR and MCLR home loan and they remain same all through the term. In practice, being flexible loans, the rates will vary and typically MCLR loans will come at a higher rate of interest.

Assuming one has to take a loan of Rs 50 lakh for 15 years, let us look at the EMI and interest burden.

Scenario 1: MCLR home loan
The EMI is Rs 49,237 and remains the same for the entire period of 180 months. The total interest paid over 180 months comes to about Rs 38,62,656.

Scenario 2: RLLR home loan
In an RLLR loan, there will be two payments to be made separately. One, for the principal repayment and others for interest payment.

The principal loan amount is divided by the tenure to arrive at the equated monthly principal (EMP). In the above example, it comes to Rs Rs 27,778 and will remain the same throughout the term. In RLLR home loan, interest payments will vary each month, in fact, it will be highest in the first month and then will keep falling.

How much of interest saved

In the above example, the borrower pays Rs 35,417 in the first month and by the time the loan ends in the 180th month, the interest portion falls to about Rs 200. From the RLLR amortization schedule, it can be seen, the total monthly payment in the case of RLLR home loan is more than MCLR home loan in the initial few years but then tapers off in the later years. In a 15 year loan, after 6 years, the monthly payments show a drastic fall compared to EMI in MCLR loans. For other scenarios, the figures could be different.

But most importantly, the comparison shows the total interest burden is lesser in RLLR loan than MCLR loan. In the example above, it is nearly Rs 6.5 lakh of lesser interest paid in RLLR, primarily because principal repayments are higher in initial years.

End note

When the repo rate is on the rise and RLLR also moves up, the impact may not be a huge one as by that time a lot of principal would already have been paid. This will hold provided the repo rates start to go after a few years into the loan and not immediatly. Being a flexible rate, for the borrower there will always exist a risk of servicing a higher rate of interest. Plan for prepayment of home loan in addition to your monthly payments to finish the home loan as early as possible to own 100 per cent equity in your own home.