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With home loan rates now linked to repo rate, it’s time for borrowers to rework their strategy and see reduced EMIs.

For years, banks tried different methods to arrive at the rate at which home loans should be disbursed, but finally it looks like they found a novel method of calculating and arriving at a rate that seems to benefit the borrowers.

The Reserve Bank’s continuous nudge to banks to pass-on the rate cut benefits every time the rates were cut had found few takers due to various challenges faced by banks; they found it difficult to arrive at an amicable method of setting the right percentage. Finally, the new method of calculating and charging the loan rates have been finalised and now the home loan rates are linked to repo rates (RLLR).

While the existing practice of arriving at the loan rate was based on MCLR or Marginal Cost of Lending Rate which is benchmarked to internal cost measurements, the new method of repo rate-linked loan rates are benchmarked against an external factor which is the rate that RBI sets from time to time.

The MCLR method of calculation was based on individual bank’s decision, while the RLLR rate is linked to RBI’s repo rate changes which significantly reduces the bank-to-bank rate anomalies.

It also has to be noted before we understand the impact of this method of loan rate calculation that the quantum of borrowing that banks do from RBI through repo is a meagre 1% of their total borrowing requirement.

Though the rate at which the borrowing is done from the central bank would have been the cheapest, the funds raised through other modes of borrowing such as deposit mobilisation and external borrowings were costlier.

This was one of the reasons that the banks were following MCLR-based setting of lending rates.

With the new mandate making banks to compulsorily link the loan rates to repo rate it becomes cheaper for the home loan borrowers and also simplifies the calculation method.


From time-to-time (usually bi-monthly) the RBI in collaboration with Monetary Policy Committee (MPC) announces any changes it would like to effect to the repo rate (repo rate is the rate at which the RBI lends to banks regularly to meet their short-term fund mismatches and temporary obligations). Every time the repo rate changes the loan rate would get modified to that extent. For example, the present repo rate is 5.40%; to this rate the banks would add other components of cost and fix the home loan rate.

The home loan rate as announced recently by State Bank of India is 7.65% which is 5.40% (repo rate) plus 2.25% other costs; the actual rate at the hands of the borrowers could be higher than or equal to 7.65% because the rate may change or vary with duration of loan, size of loan and the creditworthiness of the borrower. Such decisions are based on the case-to-case borrowing circumstances.

The flip side

Under the new RLLR method of calculating the interest rate, the borrowers would benefit during low interest regime, but in the future if the repo rate gets increased the loan rate would be increased accordingly; it is just like floating rate loans wherein the rate changes in line with interest rate changes in the market. Borrowers should brace for such situations during their long repayment tenures.

The news is not so good for those who have already borrowed from housing finance institutions (other than banks) or those who plan to borrow from HFIs because this repo-linked rate as of now is applicable only to banks and not for NBFC-based lenders. This this should be noted by borrowers.

The banks are asked not to meddle with the rates frequently but can reset the rates once in a quarter that should be linked to any changes in the repo rates. The transmission of any change should be passed on quickly to the borrowers (usually the transmission takes place in about 30 days from the date of any changes in the repo rate).

Old borrowers can move

Since the new benchmark rates would be cheaper compared to earlier practices it would be ideal for existing home loan borrowers to visit their respective lenders and request them to shift the loan rate to RLLR option which would reduce the EMI outflow.

But moving into new rates is recommended only if the loan is new and freshly availed; if the loan has already reached the fag end of the repayment tenure, moving does not make sense. Borrowers should take suitable decisions in this regard.

Though RLLR has a few negative aspects, it would benefit borrowers since the rate anomalies between banks would be negligible and in the falling interest rate scenario the EMI outflow would get considerably low over the repayment duration.

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Printable version | Jan 28, 2020 11:14:28 PM |

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