Every time RBI revises the repo rate, the revision in the interest rate on loans linked to RLLR is much quicker for the borrower compared to the loans linked to MCLR.
RBI Repo Rate: As was widely expected, the Reserve Bank of India (RBI) kept the repo rate constant in its Jan 2021 monetary policy today. The policy repo rate continues to stay at 4 per cent. Home loans are at a multi-year low and some banks are currently offering home loans at interest rates below 7 per cent. To keep the interest rate burden low, it is important to choose a lender which offers the lowest rate of home loan interest. Also, those who already have a home loan taken before October 1, 2019, they may make a switch from Marginal Cost of Funds based Lending Rate (MCLR) to Repo Linked Lending Rate (RLLR). And, whether it is an MCLR or RLLR home loan, keep a prepayment plan handy to reduce your interest rate burden.
New borrowers who need a loan now will have to take it as per the bank’s RLLR. The banks, however, may not offer loans on their RLLR but depending on the loan amount and other factors, the effective rate may differ. On average, for the majority of borrowers based on the loan amount, profession, gender etc, the home loan interest rate is 7 per cent or even higher across most banks. Some of the banks that a new borrower may explore for the best home loan interest rate includes SBI, LIC Housing Finance, ICICI and HDFC, Kotak Mahindra Bank etc.
If you are a borrower with a loan linked to Marginal Cost of Funds based Lending Rate (MCLR), the fall in MCLR will help you pay lower EMIs on your loan as and when your reset-period comes up. Those who have their loan based on MCLR may ask the banker to switch their loan to RLLR based lending. The MCLR loans can be switched to RLLR but one should carefully evaluate the cost-benefit before doing so. This may incur a cost and hence consider the remaining tenure of the loan before taking this step.
MCLR Vs RLLR loans
The Marginal Cost of Funds based Lending Rate (MCLR) was introduced from April 2016. Among other factors, the MCLR is based on the bank’s own cost of funds. However, since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI repo rate. Every time, RBI revises the repo rate, the revision in the interest rate is much quicker for the borrower compared to the loans linked to MCLR.
Any fall in MCLR will help those borrowers who have their loans linked to it and their re-set date is nearing, the reduction in RLLR will help new borrowers to take loans at a lower rate of interest. Some banks have recntly reduced their MCLR.
Let us see how a 100 basis points or 1 per cent cut in home loan interest rate impacts your EMI and total interest cost.
Assuming a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest ( On 100 basis points fall) will be:
EMI Saved – Rs 1860 ( Annually Rs 22,320)
Total interest saved – Rs 1.87 lakh
What to do
New borrowers may explore 2-3 lenders and ask for the effective home loan interest rate based on their loan amount, gender and period of the loan. But remember, whether its MCLR or RLLR home loan, keep a prepayment plan handy to repay the loan amount as early as possible. The early you repay the loan, lower will be the interest burden for you.