Repo Linked Home Loan

Repo-Linked Home Loan

Repo Rate linked Home Loan is the new home loan scheme introduced by banks as per the regulation by RBI. Under this scheme, home loan rate of interest for floating loans are benchmarked to the repo rate instead of MCLR (Minimum Cost to Lending Rate). Repo rate is the interest rate at which the Reserve Bank of India lends money to commercial banks against government securities. On 22nd May 20, Reserve Bank of India changed the Repo Rate to 4.00%.

Key Points :

• If you are an existing borrower of home loan and your bank has introduced repo rate linked home loan then you have the option to move your home loan from MCLR based to repo rate based. RBI has instructed banks to allow borrowers to transfer from MCLR based loan to Repo Rate Loan, with no additional spread or margin. However, to shift the borrower may be required to pay some administrative charges depending upon the policy of the bank.
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• The loans availed under Repo Rate Linked Home Loan Scheme will be subject to change of interest whenever there is a change in the Repo Rate.
• Banks can charge a spread over the Repo Rate to cover for their various costs and this spread can be different for different banks. However, once fixed at the time of taking a loan, the spread remains fixed for the entire loan tenure. Banks can change the spread only in exceptional circumstances like when the credit profile of the borrower changes or the operating cost structure of the bank undergoes significant changes

Eligibility

• Income : Minimum Net Monthly income required is ₹ 25,000.
• Age : Minimum age of the salaried applicant has to be above 18 years.
• Employment : The minimum continuous employment required is 1 year in the same organization. The minimum employment for self-employed is 3 years of continuous involvement in the same business.
• Loan Quantum : The minimum loan amount for a Repo Rate linked home loan is ₹ 3 Lakh.
• Tenure : Maximum tenure of the repo rate linked home loan is 30 years and this varies from bank to bank.
• Loan to Property Value Ratio : The loan cap varies between 75-90%, based on loan amount creditworthiness, repayment capacity and cost of the project.
• Lowest EMI : The lowest EMI per lakh is ₹ 655 for 30 years.
• Documents Required : Identity proof, Address proof, Property documents, Income proofs.

How does Repo Rate impact Home Loan Rates?

Repo-linked Home Loan depends on RBI's Repo Rate. Home Loan rates that are linked to repo rates are currently composed of repo rate + base spread + additional spread. Like any other floating rate home loans, this loan also has two parameters: the reset frequency of the interest rate on your loan and spread on the benchmark. These two parameters together determine the interest rate you pay on your home loan throughout the loan tenure :

• Reset Frequency : The maximum reset frequency set by RBI for Repo Rate Linked Home Loan is 3 months. However, the interest rate of your loan will change as per the reset date decided at the time of availing the loan. On that date, the interest rate will be determined based on the latest updated RLLR of the bank from which you have availed the loan.
• Spread : The next component is spread or the margin that you pay over the RBI's Repo Rate for a home loan. There are two spreads applied on Repo linked home loan i.e. base spread + additional spread. Spread on a home loan is decided as per the loan amount and risk group of the borrower. The margin would be fixed at the time of sanction.
• When RBI changes its repo rate, the interest rate on your floating rate home loan will also change by the same basis points. Your EMI will change every time there is a change in the repo rate.
• For instance, if you have taken home loan rate at floating rate of 9% and after 2 months, RBI decides to lower down the Repo Rate by 50 bps. Hence, your home loan floating rate associated with Repo Rate will also come down by 50 bps at a rate of 8.50%. Your EMI will change after 1 month as the reset period of RLLR is 3 months.

What is the difference between Repo Rate and MCLR?

Repo Rate	MCLR
External benchmark rate announced by RBI in its bi-monthly monetary policy	Internal benchmark rate of banks, as revised by banks from time to time
Current schemes offer a lower rate of interest	Rates are comparatively high
Highly transparent, as Home Loan Rate will change by the same quantum as the change in repo rate, as and when revised	Less transparent, as banks may or may not decide to revise their MCLR rate by the same quantum as the change in policy rates
The reset frequency under this scheme cannot be more than 3 months	The reset frequency under this scheme can be different for each bank and could range from 1 month to a year
Rate change transmission to the borrower is complete and within a maximum of 3 months.	Rate change transmission to the borrower may be lesser or higher with varying time period as per the reset period

FAQs on Repo Rate Home Loan

What is RLLR?

RLLR is Repo Linked Lending Rate. When a bank links its lending rate to Repo Rate, it is considered as Repo Linked Lending Rate. RLLR is a combination of the current repo rate and a mark-up which includes the operating costs and margin of the banks. Bank applies an additional spread over RLLR to arrive at home loan rate.

What is the current repo rate?

Current Repo Rate of RBI is 4.00%, last revised on 22nd May 20.

What is Repo Rate linked Home Loan?

Repo Rate linked Home Loan is the new Home loan scheme in which home loan rates are linked to repo rate instead of MCLR rates. RBI has made it mandatory for all banks to offer repo rate linked loan for all floating rate loans.

Which banks offer Repo Rate linked loans?

Top banks that offer Repo Rate linked loans are ICICI Bank, Axis Bank, SBI, PNB, Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, DBS Bank, Dhan Laxmi Bank, Federal Bank, HSBC Bank, IDBI Bank, Indian Bank, Indian Overseas Bank, Jammu And Kashmir Bank, Karnataka Bank, Karur Vysya Bank, Kotak Bank, Lakshmi Vilas Bank, OBC, Punjab and Sind Bank, South Indian Bank, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India, IDFC First Bank

What will happen to Home loan rate if repo rate is increased?

For the first three months, there will be no change in your home loan interest rate. If the repo rate increased at the time of your repricing date, then the interest rate of your loan will also increase.

What will happen if repo rate is decreased?

For the first three months, there will be no change in your home loan interest rate. If the repo rate has been decreased, then your home loan interest rate will also reduce once the reset frequency is over.

Why are repo rate loans cheaper?

Earlier banks used to determine the interest rate for their advances based on the MCLR (Minimum Cost to Lending Ratio). Banks determine MCLR based on marginal cost of funds, negative carry on cash reserve accounts, operating costs, and tenure premium. This would give a minimum rate at which banks can lend.
Whereas in the case of repo rate linked loans, the banks have to take repo rate as a base rate and add a reasonable percentage as spread to cover their costs and make a profit.

Are repo rate linked home loans better than MCLR based loans?

Repo rate home loans are certainly cheaper than MCLR based loans. Also, the effect of change in rate will get reflected on the repo rate loans in a month as compared to MCLR based loans which usually take 1 year as a base. Also, if the repo rate changes by 35 bps, then your interest rate will also change by 35 bps in Repo Rate Linked Home Loan. However, this is not the case with MCLR based Home Loan. In MCLR based loans, banks have no mandatory obligation to change MCLR based on the change in repo rate. Given the current situation of the economy, the repo rate linked home loans are better than MCLR based loans.

Should I transfer my MCLR based home loan to repo rate linked loans?

Before making the decision, you should first evaluate the benefit in the interest rate that you will get by transferring the loan along with the benefit you will get on monthly EMIs. If both the benefits are significant only then you should transfer your loan to repo rate linked home loans.

What is the minimum processing fees of repo rate home loans?

The minimum processing fees of repo rate home loans is 0.13% or ₹ 500 to ₹ 5,000, whichever is lower.