Since October 1, 2019, RBI has mandated banks to offer retail loans such as home and car loans linked to an external benchmark, which for most banks is the RBI repo rate.
In the last meeting of the Monetary Policy Committee (MPC) in the financial year 2021-22 held in February 2022, the Reserve Bank of India (RBI) kept policy rates unchanged. The repo rate therefore remains at 4% while the reverse repo rate is at 3.35%.
The RBI repo rate has a direct and immediate influence on the interest rate of the home loan. The repo rate is the interest rate at which banks borrow money from the RBI, while the reverse repo rate is the rate at which banks earn by keeping excess funds with the RBI.
Since October 1, 2019, RBI has mandated banks to offer retail loans such as home loans and car loans linked to an external benchmark, which for most banks is the RBI repo rate. For most banks, new home loans are based on the bank’s Repo Linked Lending Rate (RLLR), also known as the External Reference Rate (EBR).
Whenever RBI revises the repo rate, the interest rate reset is much faster in RLLR for the borrower compared to MCLR-linked loans. The marginal cost of funds (MCLR) lending rate was introduced in April 2016. Among other factors, the MCLR is based on the bank’s cost of equity.
Going forward, those who pay EMIs on a home loan and auto loan on a flexible interest rate basis will continue to pay almost the same interest rate that is currently applicable to them. confidence in homebuyers and support the current market and economic recovery that has shown promise in recent years,” said Lincoln Bennet Rodrigues, President and Founder of The Bennet and Bernard Company.
Most banks currently offer home loans starting at an interest rate of around 6.5%. For those looking to secure a home loan to purchase their home, the interest rate environment looks favorable to them as the interest rate on the home loan is at multi-year lows.
Banks may not offer loans on their RLLR, but depending on the loan amount and other factors, the effective home loan interest rate may differ. On average, for the majority of borrowers depending on the loan amount, occupation, gender, etc., the home loan interest rate is 7% or even higher at most banks. Some of the banks that a new borrower can explore to get the best interest rate on home loans include SBI, LIC Housing Finance, Bank of Baroda, ICICI and HDFC, Kotak Mahindra Bank, etc.
Even borrowers who pay EMI based on the bank’s MCLR may see their monthly installments revised as they reset their date. If you are a borrower with a loan tied to the marginal cost of funds (MCLR) lending rate, lowering the MCLR will help you pay lower EMIs on your loan as your reset date arrives.
Existing borrowers who already had a loan taken out before October 1, 2019 can continue their loans linked to the lending rate based on the marginal cost of funds (MCLR) or can switch to the RLLR. MCLR loans can be replaced by RLLR loans, but the cost-benefit ratio should be carefully assessed before doing so. This may incur a cost and therefore consider the remaining term of the loan before taking this step. Before changing, we can wait a few more months to get a clear picture of the evolution of interest rates.
Choose a lender that offers a low interest rate based on your profile. Even a 100 basis point cut can save you a few thousand dollars in interest charges, depending on the remaining term of the loan. Assuming a home loan of Rs 40 lakh for 15 years, one can save Rs 8.5 lakh in total interest charges and even save in EMI totaling Rs 57,000 in one year, if 2% lower rate is what l borrower chooses.
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