A repo rate linked home loan is a new entrant in the home loan sector by the banks which helps the homebuyers to immediately access any changes in the BPS points. Earlier, financial institutions offer two types of loans-fixed or floating. A homebuyer has the complete authority to choose over the loan type as per their convenience. But due to fast-changing repo rate in the last few months, homebuyers were not able to gain any profit on the same. Because of this, India’s largest financial institution, the State Bank of India (SBI) including other nationalized banks has introduced this new segment of loan for the homebuyers:
With this blog, let’s understand the key features and benefits of Repo Rate Linked Home Loan:
Repo Rate Linked Home Loan
From a much longer time, buyers who have taken a home loan from various banks were not able to gain any benefit from decreasing repo rate from Reserve Bank of India. The reason given by the banks behind this is due to the higher internal cost of funds. But, now with stricter RBI norms, some of the leading banks have introduced repo-linked lending rate (RLLR) home loan that will not only lessen up this gap but will also increase transparency and better transmission among banks and buyers.
A few weeks earlier, even RBI governor Shaktikanta Das stressed on the use of RLLR model for homebuyers. He said “I think the time has now come to formalise this linking of new loans to external benchmarks like repo rate. We are monitoring this and will be initiating the necessary steps.”
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Key Features of Repo Rate Linked Home Loan
Benefits to Home Buyers
Before finalising RLLR, you must understand that this loan is based on the Repo rate and is not completely a repo rate.
Let’s understand this with an example:
A loan borrower has taken a home loan at an interest rate of 8.4%. Now, suppose the RBI cuts the repo rate by 35 basis points. So, with RLLR, the interest rate will instantaneously reduce to 8.05% for both new and existing borrowers. It means immediate transfer to the homebuyers which were not there in case of floating interest rate that involves MCLR calculation, another complex process to calculate home loan.
However, as per the received data, the home loan lending rates in SBI currently vary from 8.40 percent to 8.55 percent. So, after the current cut in the repo rate, if any borrower has taken this loan, the interest will be slashed to 7.65%. The new rates will be applicable from September 1, 2019.
Tenure of RLLR
The maximum tenure of a floating home loan is 20 years. But, in case of RLLR it is 33 years which is again a benefit for the homebuyers. So, in case of ready-to-move-in properties, the interest EMI starts from the next month after the disbursement of the loan, while in under-construction properties, a 2-year moratorium (delay in EMI) is offered to the borrowers if there is a project delay.
In RLLR, the payment of EMI differs from other conventional home loan types. Here the borrower has to repay a minimum of 3% of the principal amount every year before he/she attains the age of 70. Although it’s an additional burden, still it is much better than the MCLR as the Principal amount decreases every year that reflect in the final payment.