MUMBAI: Floating rate home loans recently got a makeover, as the State Bank of India (SBI), the country’s largest lender launched repo rate linked home loan on July 1. So far, all floating rate loans offered by SBI were linked to marginal cost of fund based lending rate (MCLR). Now, you will have the option to choice loans linked to either repo rate or MCLR. To be sure, there are other banks that have launched home loans linked to external benchmark rate. For instance, in 2018, Citibank India launched a home loan product linked to three-month treasury bills (T-bills). In fact, in 2005, ING Vyasa Bank Ltd had launched home loan product linked to Mumbai Interbank Offer Rate (Mibor). Though it is not a new concept to link home loan rates to external benchmark, SBI is the first bank to link it to repo rate. Here are three things you should know about the product.
YOU WON’T GET HOME LOAN AT REPO RATE
Though the home loan is linked to repo rate, you will not get the loan at repo rate. Repo rate, the key policy rate, is the rate at which the central bank lends to commercial bank. Currently, the repo rate is at 5.75%. However, you will not get a loan at this rate. The home loan-linked to repo rate is actually in sync with repo rate-linked lending rate (RLLR), a rate linked with repo and a margin of 2.25%. Hence, the RLLR is 8% currently. Also you have a spread above the RLLR—40-55 basis points (bps). One bps is one-hundredth of a percentage point. Hence, you will get the loan at 8.40-8.55% per annum for a loan up to₹75 lakh. In case you take a loan linked to MCLR, you will get the loan at 8.55%-9.10% depending on factors such as gender and employment status. A 15 bps difference on a ₹30 lakh loan for 20-year tenure means a saving of around ₹70,000.
INCOME BELOW ₹6 LAKH? YOU CAN’T AVAIL IT
To begin with, the bank has put an income cap of ₹6 lakh per annum for individuals seeking to avail the repo rate-linked loans. Moreover, in case the loan-to-value (LTV) is greater than 80%, you will be charged 20 bps higher as interest rate. The bank will also take your credit score into account while giving you the loan. Hence, the interest rate will increase if your credit score is not good. In case of repayment, you have to pay a minimum 3% of the principal loan amount every year in equated monthly instalments (EMI).
INTEREST RATE LIKELY TO BE VOLATILE
Unlike MCLR, where you have a one-year and six-month reset clause, here you are likely to see immediate impact on your loan rate in case of any change in the repo rate. You have the option to leave your EMI constant while your tenure is set to fluctuate depending on the loan rate. If you are not comfortable with the repo rate-linked home loan product, the bank gives you an option to switch to MCLR-linked home loan rate.