Your Money: Four Factors Affecting Interest on a Home Loan

A house is perhaps the most precious possession in life. Buying a house with your own funds is the best way as it saves on interest charges, but if you are short on funds, you can always opt for a home loan.

Currently, home loan interest rates are at their lowest in a decade, last seen around 2007, probably a good time to become a homeowner after renting. However, before you approach a bank for a home loan, here are a few things to keep in mind.

The RBI has asked banks to offer flexible retail loans, including home loans, at an interest rate linked to an external benchmark. For most banks, the RBI repo rate is the external benchmark rate to which they have tied the interest rate on their home loan. These loans, available from October 1, 2019, are referred to as Repo Rate Linked Lending Rates (RLLR), also referred to as External Reference Lending Rate (EBLR) by some banks.

So when you walk into a bank branch for a home loan and ask for their interest rate on the home loan, it is the RLLR that you should ask first. The lower a bank’s RLLR, the lower the EMI will be for you. Currently, for most major banks, the RLLR is around 6.5%, which reflects 4% of the RBI repo rate and a markup of 2.5% or even more.

Banks cannot lend to RLLR
However, not all banks lend to RLLR and instead there might be a margin or credit risk premium that the bank might charge. Borrowers with a good credit history and a high credit rating have a chance of being eligible for a home loan at the bank’s RLLR.

The actual home loan interest rate, and therefore the EMI, will depend on several factors such as applicant’s gender, income, loan amount, tenure, loan-to-value ratio, occupation, loans existing ones and, above all, your credit score. The higher the credit score, the better the chances of getting a lower interest rate on the home loan.

Ask the banker to tell you the home loan interest rate and eligible amount based on your specific parameters. This can be a starting point for comparing rates with other bankers.

RBI’s repo rate and impact on RLLR
Being a flexible home loan with interest rates tied to RBI’s repo rate, your RLLR based loan’s EMI will vary whenever there is a repo rate review by RBI. The transmission of rate revisions is immediate in RLLR as interest rates will change at quarterly intervals on the first day of the calendar quarter following the change in the RBI repo rate.

“With RLLR-linked home loans, borrowers benefit from faster transmission of interest rates on their loans. Previously, with MCLR-based loans, banks took months to pass on the benefits of the policy change to borrowers. Nowadays, in the case of RLLR, any increase or decrease in the interest rate is applicable from the next reset date. Most public banks offer a reset period of one calendar quarter, and the applicable interest rate changes from the first day of the upcoming calendar quarter,” says V Swaminathan, CEO of Andromeda and Apnapaisa.

In a declining interest rate environment, RLLR-based loans favor policyholders, but when the repo rate rises, policyholders feel the pinch in terms of higher EMIs.

NBFC loans are not on RLLR
While banks’ lending will depend on the bank’s RLLR, for those who take out home loans from a non-bank finance company (NBFC), it is the interest of the NBFC home loan that counts. The lower an NBFC’s cost of funds, the lower the interest rate on home loans will be. It is important to note that there may not be an immediate impact on the RBI’s revision of the repo rate on EMIs of home loans from NBFC borrowers.

Switch from MCLR to RLLR
If you want to convert your MCLR home loan from one bank into an RLLR home loan, you can do so either with the same bank or with another bank. This may incur charges. So carefully assess the cost difference before switching.

Getting in
Not all banks lend to RLLR. Instead, a bank may charge a credit risk spread or premium
In a declining interest rate environment, RLLR-based loans favor policyholders
The higher the credit score, the better the chances of getting a lower interest rate
Repo Rate Review May Not Impact NBFC Borrowers’ Home Loan EMIs

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