SBI’s repo rate-linked home loan decoded

Mumbai: State Bank of India (SBI), the country’s largest lender, has launched repo rate-linked home loan product effective 1 July. So far, all new floating rate home loans were linked to marginal cost of fund based lending rate (MCLR) since August 2016.

From 1 July, you will have the option to choose between MCLR linked home loan rate and repo rate linked home loan rate. “Customers coming to us for floating rate home loans will be offered both options— MCLR-linked home loans as well as repo rate-linked home loans,” said PK Gupta, managing director, SBI.

If you opt for the repo rate-linked home loan, you will see a direct impact whenever the repo rate changes. Here is how the product works and what it means for you:

What is on offer?

To begin with, let’s first understand the policy rate. Repo rate or the repurchase rate is the interest rate at which the central bank lends short-term money to commercial banks. When there is a cut in the repo rate, the banks get money at a cheaper rate. This should mean that banks will pass on the benefit of cheaper money to the home loan consumers.

However, transmission of rate cut continued to remain slow as banks’ cost of funds also came into play while calculating loan rate. To bridge that gap, SBI launched repo rate linked home loan.

However, it is not directly linked to the repo rate number. The loan is linked to repo-linked lending rate (RLLR). “RLLR is 2.25% over repo rate. So right now repo rate in 5.75% and hence RLLR is 8%,” said Gupta. There is a spread of 40 basis points (bps) and 55 bps above the RLLR. So effectively, your home loan rate for amount up to ₹75 lakh will be 8.40%-8.55%. Currently, home loan linked to MCLR is 8.55% to 9.10%.

To be eligible to take a repo rate-linked home loan, you need to have a minimum annual income of ₹6 lakh. Also, in case of repo rate-linked home loan, you have to repay a minimum 3% of the principal loan amount every year in equated monthly instalments. The maximum loan tenor is 33 years over and above maximum moratorium permitted of two years for under-construction properties. The total loan tenor cannot exceed 35 years. The bank will charge a premium of 20 bps above applicable interest rate if the loan-to-value is greater than 80%.

Should you go for it?

If you just look at the interest rate, the loan-linked to repo rate is 15 bps cheaper if your credit worthiness is higher. “This product is different. We will see how people receive it and whether we have to tweak it depending on the response,” said Gupta.

In case of repo rate-linked loan you will see the change in rate immediately as there is no reset clause like MCLR, he added. On May 1, the bank had linked its savings account deposit and cash credit and overdraft to repo rate. It was a strategic plan of the bank to first link products from liability side to repo rate and then the assets side.

“For us to link products to repo rate on the asset side we should have some liabilities also linked to it. Hence, we first linked our savings rate with repo rate and now we have linked some of the asset side products to repo rate. Ultimately we need to balance on both sides of the balance sheet,” said Gupta.

The bank said in this product it will segregate the equated monthly instalment (EMI) amount. “We are segregating the EMI. Earlier, EMI was interest and principal. Here, the principal EMI will be fixed at principal instalment and interest will be in actuals. If you take this loan, 3% of the principal has to be repaid every year. For example, for a ₹10 lakh loan, 3% or ₹30,000 will have to be repaid every year plus the interest. Only interest rate varies every year. The EMI will in a way vary. We will be announcing basic parameters in a few days,” he added.