Your Money: Four factors affecting interest on home loan

There can be a cost attached to switching your MCLR linked home loan to a RLLR home loan

A home is perhaps the most prized possession in one’s lifetime. Buying a home with your own funds is the best way as it saves on interest cost, but if short of funds, you can always go for a home loan.

Currently, home loan interest rates are at a decade low, last seen around 2007—probably the right time to become a homeowner from being a tenant. However, before you approach a bank to get a home loan, here are a few things to keep note of.

Banks have been asked by the RBI to offer flexible retail loans, including home loans, at an interest rate linked to an external benchmark. For most banks, the RBI’s repo rate is the external benchmark rate to which they have linked their home loan interest rate. Such loans, available from October 1, 2019 are called repo rate linked lending rate (RLLR), also referred to as external benchmark lending rate (EBLR) by some banks.

So, when you walk into a bank branch for a home loan and ask for their home loan interest rate, it is the RLLR that you initially need to ask for. The lower the RLLR of a bank, the lower will be the EMI for you. Currently, for most leading banks, the RLLR is around 6.5%, which reflects 4% of RBI’s repo rate and a mark-up of 2.5% or even higher.

Banks may not lend at RLLR
However, not all banks lend at RLLR and instead there could be a spread or credit risk premium that the bank may charge. Borrowers with good credit history and a high credit score stand a chance to be eligible for a home loan at the bank’s RLLR.

The actual home loan interest rate, and thereby the EMI, will depend on several factors such as applicant’s gender, income, loan amount, tenure, loan-to-value ratio, profession, existing loans and most importantly, your credit score. The higher the credit score, the better the chance to get a lower rate of interest on the home loan.

Ask the banker to quote you the home loan interest rate and the eligible amount based on your specific parameters. This can be a starting point to compare the rates with other bankers.

RBI’s repo rate and theimpact on RLLR
Being a flexible home loan with interest rates linked to RBI’s repo rate, your RLLR based loan’s EMI will vary each time there is a revision in the repo rate by RBI. The transmission of rate revisions is immediate in RLLR as the interest rates will change at quarterly intervals on the first day of the calendar quarter subsequent to the change in RBI’s repo rate.

“With RLLR linked home loans, borrowers enjoy a faster transmission on their loan interest rates. Earlier with MCLR-based lending, banks used to take months to pass on the policy change benefits to the borrowers. Nowadays, in the case of RLLR, any increase or decrease in the interest rate is applicable from the next reset date. Most public banks offer a reset period of a calendar quarter, and the applicable interest rate changes from the first day of the upcoming calendar quarter,” says V Swaminathan, CEO Andromeda and Apnapaisa.

In a declining interest rate environment, RLLR based loans favour policyholders but when the repo rate rises, the policyholders feel the pinch in terms of higher EMIs.

NBFC loans are not on RLLR
While the loan from banks will depend on the bank’s RLLR, for those taking home loans from a non-banking finance company (NBFC), it is the home loan interest of NBFC that matters. The lower the cost of funds of an NBFC, the lower will be the rate of interest on home loans. Importantly, there may not be any immediate bearing of RBI’s revision in repo rate on home loan EMIs of NBFC borrowers.

Switch from MCLR to RLLR
If you want to switch your home loan linked to a bank’s MCLR to a RLLR home loan, you can do so either with the same bank or with a different bank. There could be a cost involved in doing so. So, carefully evaluate the cost difference before switching.

Homing in
Not all banks lend at RLLR. Instead a bank may charge a spread or credit risk premium
In a declining interest rate environment, RLLR based loans favour policyholders
Higher the credit score, better the chance to get a lower rate of interest
Revision in repo rate may not have any impact on home loan EMIs of NBFC borrowers