Repo Linked Home Loans: Are they Really Worth?

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Home Loans

The Reserve Bank of India mandated that since 1st October 2019, all home loans offered against floating interest rate will have to be linked with external benchmarks such as repo rate. It typically encouraged more individuals to opt for a home loan by making such financing affordable as well as transparent. 

The system was introduced after it was observed that financial institutions were not passing on the benefits of changes in the repo rate to borrowers who opted for internal benchmark linked home loans.

What is the repo or repurchase rate?

The repurchase rate can be defined as the rate at which the Reserve Bank of India lends to other financial institutions in the country. The meaning of repo rate also extends to its use as an essential tool that is used by the apex bank to control the economy by regulating money supply and inflation levels. 

In case of a repurchase rate cut, commercial banks will borrow at a lower rate which can be passed on to customers, meaning that borrowers will be able to avail funds at low rates of interest. Furthermore, after October 2019, any increase or decrease in repo rate will directly impact home loans, whose interest rates are benchmarked to RLLR or Repo Linked Lending Rate. 

For example, if the repurchase rate is slashed, then RLLR will also come down. Thus, borrowers who have opted for home loan linked to repo rate will be able to save a significant amount on yearly interest outgo.

Apart from this, other benefits of RLLR are as follows

  • The Repo Linked Lending Rate is an external benchmark rate which does not impact the bank’s own cost of funds in any way. Thus, borrowers can directly benefit from any of RBI’s repo rate cuts.
  • In the case of MCLR or Marginal Cost of Funds based Lending Rate, an internal benchmarking system, the rate was revised either after a 6 month or one year period or longer. Contrarily, the RLLR should be mandatorily revised after 3 months. Thus, in case of repo linked home loans, borrowers can benefit from a quick transmission from any reduction in the rate cut by the Reserve Bank of India. 
  • The interest burden under the RLLR system is lower compared to marginal cost-based lending rate due to the exclusion of internal costs. 

According to the latest monetary policy statement released by the Reserve Bank of India, the current repo rate stands at 4% after subsequent cuts. Given the lingering economic stagnancy, experts also believe that such a trend is expected to continue in the near future. Therefore, prospective home buyers can apply for a home loan now to reduce their interest burden. 

On that note, they should also look for lending institutions that offer additional features and benefits such as pre-approved offers to simplify and fast-track the loan application procedure. Besides home loans, such offers can be availed on several other financial products, like loans against property. One can quickly check his/her pre-approved offer by providing the name and contact information. 

Home loan balance transfer

A borrower who has already availed a home loan on the floating interest rate can also request his/her lender to switch from MCLR-based interest rate to the RLLR-based lending system. In that case, he/she may need to pay a nominal fee during such switch-over. 

However, if you are not satisfied with the rates offered by your existing financial institution, you can consider refinancing your loan with another lending institution. 

In that case, you need to take into account additional charges such as processing fees, property valuation, legal fees, etc. You should also go through the spread offered by other financial institutions over the repo rate linked lending rate and opt for the lowest spread to maximise benefits.

During home loan balance transfer, lending institutions also offer additional credit facilities such as top-up advances, which can be availed without providing any additional documentation. 

There are several ways you can benefit from a top-up loan. For instance, lenders put no restrictions regarding its end-use and the advance can be utilised to meet an array of financial obligations.

One can also claim tax benefits on home loan if such amount has been used towards repairs and renovation of the home. In that case, borrowers can claim tax exemption and deduction on both the principal and interest component. 

Nevertheless, in case the repo rate rises, home loans will also be set to be dearer. Thus, borrowers must keep in mind the existing and predicted trends of changes in the repurchase rate before availing home loans. They can also adopt several measures to decrease their home loan interest such as opting for a shorter loan tenure, making part-prepayments, etc.