Updated: Nov 13, 2020
Is your home loan interest linked to Repo Rate?
If yes, now your home loan is at the lowest interest right now because the current repo rate is lowest ever.
If you want to reduce the burden of debt then this is a chance to prepay the loan as maximum as you can.
What is RLLR (Repo Rate Linked Lending Rate)?
When your loan interest is linked to current repo rate that means a change in repo rate announced by RBI (Reserve Bank of India) affects your loan interest.
This RLLR is equal to the repo rate plus the bank’s markup. To this rate, the spread is also added to arrive at the final interest rate (spread is margin decided by banks from which you’ve taken the loan depending on your credit profile).
The current repo rate is 4.00%. Now, consider markup by SBI (State Bank of India) is 2.25% which equals to 6.25% (4.00% + 2.25%) and spread depending on credit profile is 1.10%. The total interest on a home loan can vary from 6.25% to 7.75% (RLLR is 6.25% + Spread of 1.50% = 7.75%)
When repo rates are revised by RBI, the change in your interest is affected on the first day of the following month.
Is your home loan interest linked to repo rate or not?
Earlier there was MCLR regime (Marginal Cost of Funds based Lending Rate) introduced in 1st April 2016.
Due to delay in passing benefits of repo rate, in 1st Oct, 2019, RBI guided all banks to benchmark retail loan to repo rate or other benchmarks published by FBIL (Financial Benchmarks India Private Ltd.). This also helped for faster transmissions.
What is this reference rate?
The reference rate is the minimum rate below which lenders cannot lend money. The reference rate can be internal or external.
The internal reference is the Marginal Cost of Funds based Lending Rate (MCLR) which is calculated internally by the bank.
The external reference rate is RBI’s repo rate or any other benchmark published by FBIL.
What is the spread?
The spread is margin decided by banks depending on the credit score, history, loan amount and other factors of borrower.
MCLR or RLLR
MCLR is calculated internally by the bank depending on marginal cost of funds, operating expenses, tenure premium and cost of maintaining CRR (Cash Reserve Ratio).
MCLR has reset period of 6 or 12 months that means your loan interest rate bound to be revised every 6 or 12 months.
Interest rate linked to repo rate revised every 3 months by the bank as repo rate is revised by RBI every 3 months (that doesn’t mean every time repo rate will be increased).
That means repo rate linked interest rates (RLLR) are more volatile than linked to the marginal cost of funds (MCLR).
In case the repo rate is increased by the RBI, your loan interest also increases.
Source: post on Financial Express by the CEO of BankBazaar.com