Why Are Repo Rate Linked Housing Loans Less Expensive Options for Borrowers?

The consecutive repo rate cuts by the Reserve Bank of India since Feb 2019 have nudged several financial institutions to offer repo rate linked housing loans. This linking is an effective move for borrowers, which makes home loans more affordable in case of a rate cut. It also aims to bring more transparency in the policy transmission. Some lenders have already introduced this new scheme while others are yet to adopt.

Quick highlights

  • As per RBI instructions on 4th Sept 2019, financial institutions should link home loans with floating interests with an external benchmark. 
  • The linking shall start from 1st October this year.
  • The latest repo rate cut was at 4.00% on 22nd May’20.

Understanding repo rate linked housing loans

Repo rates are the rates at which financial institutions borrow funds from the RBI. It is an instrument that RBI uses to keep economic inflation under control.

What existed so far

In case of regular home loans, interest rates are calculated based on the MCLR or Marginal Cost of Funds-based Lending Rate.

  • Financial institutions set this internal reference rate nominally based on RBI’s current repo rate, and its calculations are complex as well as opaque.
  • MCLR gets influenced by several factors, which is a significant reason for the transmission not happening before.

Also, lenders reset their lending rates after a specific interval as per their agreement. Therefore, irrespective of the rate cuts of RBI, end customers saw an EMI reduction only after adjustments by the lender.

What the latest mandate brings 

A repo rate linked home loan is a viable way to speed up this transmission process so that customers enjoy the advantages of RBI’s actions. 

  • These loans are less expensive simply because the interest is based on the repo rate.
  • No reset clause of financial institutions shall exist henceforth.
  • Interest rates of repo rate linked housing loans shall change immediately on RBI’s actions. 
  • Transmission is expected to be much faster.

Note that borrowers can avail the RLLR or Repo-linked Lending Rate loans only on floating rate of interest. Repo rate changes do not impact fixed interest rates as those are priced differently. You must know how much home loan EMI you can afford before applying for one.

Simultaneously, borrowers availing a repo rate linked housing loan must be aware of its adverse effect too. 

  1. In case the RBI increases the key lending rate following market conditions, loan EMIs shall rise rapidly with immediate effect. 
  2. Borrowers may need to pay additional charges like processing fees, service charges, etc.   
  3. The cost of borrowing home loan finance shall be more if the applicant holds a below par credit history. 
  4. Individuals availing repo rate linked loans must maintain some balance in their account. This helps in situations when EMIs suddenly increase with the rates going up.

Ensure to hold a clear idea regarding the expectations from an RBI repo rate cut.

Check out the alternatives here

A feasible alternative can be a housing finance from NBFCs offering reasonable rates of interest. Bajaj Finserv is one of the most reliable lenders in India who provide Home Loans up to Rs. 5 Crore with lucrative benefits and utmost flexibility. You can use the online home loan calculator to know your monthly outflows beforehand.

Apply for the loan online or look for pre-approved offers to process the application quickly. 

Pre-approved offers from Bajaj Finserv are tailor-made for existing customers and available on home loans, personal loans, business loans, and a host of financial products. Such schemes simplify the loan availing procedure and save more time. Provide a few of your personal details such as name, contact number, etc. to check your pre-approved offers instantly.

Before applying for an advance, ensure to use an online eligibility calculator and check home loan eligibility for the funds. The tool calculates the amount you are eligible to avail based on your provided details. 

Plan your financial requirements precisely and avail a loan with the best rates and features from a trusted lender.

alexjohn

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