Home loan interest rates, which have been declining ever since 2019, have started rising with banks such as State Bank of India (SBI) and Bank of Baroda (BoB) hiking rates. Both these banks have increased the interest rates of borrowers servicing MCLR-based home loans. While SBI has hiked these rates by 0.10%, BoB has done the same by 0.05% per annum.
These rate hikes come despite the Reserve Bank of India (RBI) holding its policy rates in its bi-monthly monetary policy review in April 2022. However, given the steep inflation aided by the Russia-Ukraine war, which does not show signs of ending soon, the RBI is expected to increase the policy rates for the first time since 2019 in a month. That will increase the MCLR further and also raise the Repo-linked Lending Rate (RLLR), the latest interest rate benchmark adopted by banks. However, the ones with an RLLR-based home loan will still save over their MCLR counterparts. Let’s check how.
But Before That – Let’s Check How Home Loan Rates are Ascertained
Banks set the home loan interest rates by adding over the RBI repo rate. That addition is called spread which banks place to factor in the risk a loan attaches to them in case borrowers default.
Why Will the RLLR-based Home Loans be Cheaper for Customers?
It will be due to inadequate transparency existing in the MCLR-based home loan, a fixed spread throughout the RLLR-based home loan term, etc. Let’s know more about these.
MCLR Does Not Prove Transparent in Rate Transmission
To ensure transparency in the transmission of rates to eventual customers, the RBI introduced the Marginal Cost of Lending Rate (MCLR) in 2016 for banks to price their home loans and other lending products. But the transparency never came as thought out to be. If the RBI had cut the repo rate by 0.25%, the MCLR-based home loan rate would come down by 0.15% only. However, banks used to raise the rates in the same proportion as and when the RBI hiked the repo rates. Customers never felt that transparency in an MCLR-based home loan. As a result, they could never save what they deserved.
Benchmark MCLR of Banks are Above Repo Rate
The benchmark MCLR of banks is almost 2-3% above the repo rate. For instance, the RBI Repo Rate is 4%. Whereas most banks’ one-year MCLR is 7% and above on which they set interest rates for borrowers. Plus, there’s a spread over the same. The eventual home loan interest rate comes much higher. Whereas, in the case of RLLR, the benchmark rate is the repo rate itself over which the spread applies. That makes RLLR-based home loans cheaper than their MCLR counterparts.
Transparent RLLR-based Home Loans Help Borrowers Save More
The lack of transparency led the RBI to introduce RLLR for banks to decide interest rates. It ensured the transparency in rate transmissions for customers that the RBI and customers had expected. This RLLR-based home loan has eased interest rates by around 2% since its introduction in 2019. The RLLR-based home loan rates, which will likely firm post the likely rise in RBI policy rates, would still be lower than that of MCLR.
Fixed Spread Makes RLLR-based Home Loans Further More Appealing
While banks can change the spread portion over MCLR, they can’t do so in the case of RLLR. The RLLR-based home loans come with a fixed spread throughout the loan term unless there’s a significant change in one’s credit profile. So, if your credit score is good, the interest rate will soften considerably.
