Your Money: Four Factors That Affect Home Loan Rates

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

Currently, home loan interest rates are at a ten-year low, last seen around 2007 – probably the right time to go from renter to homeowner. However, before you approach a bank to get a home loan, there are a few things to keep in mind.

Banks have been asked by the RBI to offer flexible personal loans, including home loans, at a rate linked to an external benchmark. For most banks, the RBI’s repo rate is the external reference rate to which they have pegged their home savings rate. Such loans, available from October 1, 2019, are known as Repo Rate Linked Lending Rate (RLLR), also known as External Benchmark Lending Rate (EBLR) by some banks.

So if you go into a bank branch for a home loan and ask for the interest rate on the home loan, it is the RLLR that you need to ask for first. The lower a bank’s RLLR, the lower its EMI will be for you. Currently, the RLLR for most leading banks is around 6.5%, which is 4% of RBI’s repo rate and a premium of 2.5% or even more.

Banks are not allowed to lend to RLLR
However, not all banks lend at the RLLR and instead there might be a spread or credit risk premium that the bank may charge. Borrowers with good credit and a high credit score stand a chance of being eligible for a home loan with the bank’s RLLR.

The actual home loan interest rate, and therefore the EMI, depends on several factors, such as: B. the gender of the applicant, the income, the loan amount, the tenure, the loan value, the profession, existing loans and above all your creditworthiness. The higher the credit rating, the better the chance of a lower interest rate on the home loan.

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

RBI’s repo rate and how it affects RLLR
Because this is a flexible home loan with interest rates linked to the RBI’s repo rate, the EMI of your RLLR-based loan will change whenever the RBI changes the repo rate. The propagation of interest rate changes is instantaneous in the RLLR as interest rates change on a quarterly basis on the first day of the calendar quarter following the RBI repo rate change.

“With RLLR-linked home loans, borrowers enjoy faster delivery of their loan interest. Previously, with MCLR-based loans, it took banks months to pass on the benefits of the policy change to borrowers. Today, in the case of RLLR, any increase or decrease in the interest rate applies from the next reset date. Most public banks offer a calendar quarter rollback period and applicable interest rates change from the first day of the upcoming calendar quarter,” said V Swaminathan, CEO of Andromeda and Apnapaisa.

In an environment of falling interest rates, RLLR-based loans favor policyholders, but when the repo rate rises, policyholders feel the dilemma in the form of higher PMIs.

NBFC loans are not on RLLR
While lending from banks is dependent on the bank’s RLLR, for those borrowing from a non-bank finance company (NBFC) for home loans, the NBFC’s home loan interest rate is what matters. The lower the funding cost of an NBFC, the lower the home loan interest rate. Importantly, the revision to RBI’s repo rate may not have an immediate impact on NBFC borrowers’ home loan EMIs.

Switch from MCLR to RLLR
If you wish to convert your home loan linked to a bank’s MCLR into an RLLR home loan, you can do so either with the same bank or with a different bank. This could incur costs. Therefore, carefully evaluate the cost difference before switching.

homing in
Not all banks lend at RLLR. Instead, a bank may charge a spread or credit risk premium
In an environment of declining interest rates, RLLR-based loans favor policyholders
The higher the credit score, the better the chance of getting a lower interest rate
A repo rate change may not impact NBFC borrowers’ home loan EMIs

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