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SBI has launched Repo Rate linked housing loans, which would be effective from July 1, 2019. RBI has been continuously working on improving policy rate transmission to the borrowers as is evident by their shift from PLR to base rate and then to MCLR. The idea of launching MCLR linked loans was to ensure that change in Repo Rate should change the cost of raising new funds for the bank, and that would lead to a change in lending rates. However, it was observed that despite the reduction in the repo rate basis points by the central bank, the same was not transferred to the MCLR by the commercial banks. This can be further supported with illustrations, for example, the Repo Rates in the Jun-Aug 2017 period fell from 6.25% to 6%; however, the 3-year MCLR rates of SBI remained constant at 8.15%. Also, in the Feb-May 2019 period, the Repo Rate was reduced by 50 basis points; however, the MCLR followed with just a 21 basis point reduction. This essentially meant that banks were being subjective and were not comfortable transferring the rate cuts to their borrowers.
The new Repo Rate linked product will make policy transmission automatic. This means a 25 bps point cut in Repo Rate should result in a 25 bps rate cut for home loan borrowers.
With this view, the SBI initiative of Repo Rate linked housing loans is aimed at direct transfer of benefits from changes in the Repo Rate besides ensuring greater transparency in consumer loans.
- Eligibility: Repo Rate Linked Home Loan is offered to borrowers with a minimum annual income of Rs. 6 lakh.
- Interest Rate: The interest rate on SBI home loan linked to the Repo Rate is 8.20%, which is lower than the current MCLR linked home loan rate of 8.25%. The home loan rate is calculated as Repo Rate + Base Spread + Additional Spread. The bank is charging a base spread of 2.65%, and an additional spread of 15 bps over the repo rate is 5.40%, which translates into a home loan rate of 8.20%. In case of a change of Repo Rate, SBI will change the home loan interest rate linked to the repo rate on the 1st day of the following month.
- Annual Income: To be eligible for a home loan linked with repo rate, you need to have a minimum annual income of Rs. 6 Lakh.
- Tenure: The maximum tenure of Repo linked home loan is 33 years and can go up to 35 years in case of under-construction properties. This tenure is higher in comparison to the MCLR linked housing loan tenure of 30 years.
- Repayment Terms: Under the Repo Rate home loan scheme, you haSBI Announces Repo Rate Linked to Home Love to repay a minimum of 3% of the principal amount every year in EMIs.
- Existing MCLR Rate Borrowers: Existing borrowers of SBI also have the option to switch from MCLR linked home loan to the Repo Rate linked product by paying one time charges of 0.25% of the loan amount.
Benefits of Repo Rate linked Price
This repo linked lending rate would be especially beneficial when the Repo Rate is predicted to fall, however, at the same time, a sharp increase in Repo Rates in the monetary policy by the central bank can cause the interest rate to rise substantially. This product is useful in case of reducing interest rate scenarios, and for borrowers who are prepared to bear the impact of an increase in home loan interest rates.