Repo rate-linked home loans a better bet

S C Dhall

The new repo rate-linked home loans being offered by banks could actually turn out to be cheaper for home buyers besides being more transparent. For example a borrower takes a loan of Rs 50 lakh for a period of 10 years at the current repo rate of 5.4 per cent. The effective interest rate will be 8.05 per cent (5.4 + 2.25 + 0.4) and the monthly instalment will be Rs 60,796. But these also carry the risk of the monthly instalments going up in the event of a sustained increase in the repo rate. So, as in the above case, if three months down the line, the RBI raises the repo rate by 25 basis points, the effective interest rate will then be 8.3 per cent. If the loan tenure is kept unchanged, this will mean that the instalment will increase to Rs 61,445. Similarly, if the RBI cuts the repo rate by 25 basis points from 5.4 per cent to 5.15 per cent, then the instalment will shrink to Rs 60,151.

Increased transparency

However, one can’t deny the fact that with the repo-linked rate, there will be a lot more transparency. As a home-loan borrower will know exactly what the rate is, what the spread is. If you know what the reset date is, you also know what the rate will be following an RBI action and when it will come into effect. 

Risk factor

Some consumers are apprehensive that a repo rate-linked product will mean that the effective interest rate of the loan would change frequently, thereby making it more difficult for the loan taker to make the payments systematically. This, however, is a risk most borrowers already take when they opt for floating rate loans. 

In a scenario where the monthly instalment increases due to RBI’s action, borrowers will have to make sure that the higher amount is available in their bank accounts since the increase will take place automatically on the reset date.

Benefits for whom?

There has been a delay in transmission of rate cut by banks linking loans with MCLR. But now, there are better options.  In a repo-linked home loan scheme, borrowers don’t need to wait for banks to revise the MCLR rate, which will lead to a change in the effective interest rates of home loan when a rate cut is announced by RBI. So, who’s is going to benefit from this new move? SBI wants borrowers to have a minimum annual income of Rs 6 lakh to be eligible under repo rate. Due to such annual income cap, a large part of the market will not be able to avail benefits of this scheme. At present, The borrowing is mainly happening in the affordable housing segment and Pradhan Mantri Awas Yojana (PMAY) scheme, wherein the income of the borrower is less than Rs 6 lakh per annum.