State Bank of India (SBI) has revised its repo rate linked home loan scheme effective October 1. The bank has now increased the interest rates marginally for salaried and non-salaried borrowers.
The bank was the first to introduce a repo-rate-linked home loan scheme, earlier in July this year. On September 16, SBI withdrew this scheme to make certain changes in the product and interest rates.
In keeping with Reserve Bank of India’s (RBI’s) guidelines, banks had to link all new floating rate home, auto and other retail loans to external benchmarks from October 1, 2019. Several banks have started offering loans with repo-linked lending rates.
SBI is also back with a new repo-rate-linked home loan scheme. It has adopted repo rate as the external benchmark for all floating rate loans offered to micro, small and medium enterprises (MSMEs), housing firms and retail customers.
Here is how the new home loan product from SBI works.
What is it about?
Earlier, floating rate home loan borrowers had only one option—loans linked to the marginal cost of funds based lending rate (MCLR). But now, they can take a home loan linked to the repo rate.
To be eligible for SBI’s repo-rate-linked home loan scheme, the borrower should have a minimum annual income of Rs 6 lakh. The tenure of the loan is up to 33 years. In the case of under-construction projects, a maximum moratorium period of up to two years is offered over and above the maximum loan tenor of 33 years. So, in such cases the total loan tenure cannot exceed 35 years.
SBI charges a spread of 265 bps above RBI's repo rate, which currently stands at 5.4 per cent. This brings its external benchmark-based lending rate to 8.20 per cent from October. Till September, new borrowers could avail home loans from SBI at rates starting from 8.05 per cent.
Now, for salaried borrowers, the effective home loan rate changes. The bank will now charge a premium of 15 bps on loans up to Rs 30 lakh, taking the effective home loan rate to 8.20 per cent. The interest on loans between Rs 30 lakh to Rs 75 lakh will now stand at 8.45 per cent after levying a premium of 40 bps. Similarly, all loans drawn above Rs 75 lakh attract a premium of 50 bps, taking the effective lending rate to 8.55 per cent. For non-salaried borrowers, SBI charges an additional premium of 15 bps.
In this home loan scheme, the borrower needs to repay a minimum of three per cent of the principal loan amount every year in equated monthly installments. If you take a home loan of Rs 50 lakh, you need to repay a minimum of Rs 1.50 lakh as principal plus the interest cost every year.
Apart from interest rates, there are additional costs for borrowers opting for a repo-linked home loan scheme. The bank charges a processing fees of 0.35 per cent of the loan amount plus service tax. The minimum fees will be Rs 2,000 and the maximum is Rs 10,000 plus service taxes.
Borrowers opting for the repo-linked home loan scheme don’t need to wait for banks to revise the MCLR rate. This rate changes when a rate cut is announced by the RBI.
Says Raj Khosla, Managing Director and Founder, MyMoneyMantra, “The repo-rate-linked home loan scheme is transparent compared to loans linked to the MCLR. The interest rates on loans will change upwards or downwards in line with the movement of the repo rate announced by the RBI.”
The borrowers of repo-linked home loans from SBI may benefit from the cut in interest rates from the month following the RBI’s monetary policy announcement.
SBI is giving a concession of 5 basis points (bps) on home loan rates to women borrowers. So, in case the first applicant in a joint loan is a woman while taking a home loan, she is eligible for this concession from the bank.
SBI imposes a premium of 10 bps on the interest rate if the loan-to-value ratio is more than 80 per cent, which increases the borrowing cost. This is applicable only for loans up to Rs 30 lakh.
The bank also takes into consideration the credit score of borrowers. So, if you have credit score below 600, the bank may consider you to be a higher-risk borrower. In such cases, the bank may levy an additional premium of 10 bps. This further increases the borrowing cost.
In this scheme, borrowers need to be prepared for volatility in their tenure or EMIs. Any change in repo rate will be applicable from the first day of the following month. There are several borrowers who are not prepared for this concept of volatility in EMIs.
Gaurav Gupta, co-founder and CEO of MyLoanCare.in says, “In this scheme, borrowers need to be prepared for a hefty increase in interest rates in case the RBI increases repo rates due to economy-related factors.”
According to an ICRA report, in future, a 50 bps rise in repo rate could lead to Rs 2,200 increase in equated monthly instalments (EMIs) for borrowers taking a loan of Rs 75 lakh with tenure of 15 years. In case there is a repo rate hike of 100 bps on the same loan and tenure, your EMI will rise by Rs 4,500.
These loans are available only to borrowers with an income of above Rs 6 lakh per annum. With its features, the repo-rate-linked scheme is primarily targeted at borrowers in tier I, tier II and tier III cities.
Further, existing borrowers of SBI have the option of switching from the MCLR-linked home loan to the repo-rate-linked product by paying a one-time charge of 0.25 per cent of the loan amount. You need to calculate the real savings, additional charges and operational issues while deciding to switch. If you are at the end of the loan’s tenure, switching to a repo-rate-linked product may not result in much savings.
Consider applying for the repo-linked home loan scheme if you are able to adapt to volatility in EMIs frequently.