State Bank of India (SBI), the country’s largest lender, will be introducing a new product wherein the home loan interest rate is linked to repo rate set by the Reserve Bank of India (RBI). The facility – under which the interest rate will move instantly in sync with the repo rate – will be released on July 1, 2019.
The repo rate is a benchmark interest rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive.
Under the new product, the home loan shoppers opting for the product will see interest rate moving in accordance with the repo rate that is decided by RBI. For instance, if someone takes a home loan at 9% interest rate, the buyer can see a reduction of their rate when the RBI reduces repo rate. Similarly, it will move up when the rates are hiked by the central bank.
Marginal Cost of Funds Based Lending Rate
Currently, SBI’s home loan rates are linked to its Marginal Cost of Funds Based Lending Rate (MCLR) and will continue to offer home-loan products linked with it with an option where the home loan seekers will have an option to take SBI home loans that are linked with the RBI repo rate.
“The decision to link home loan with the repo rate was taken after scrutinising its impact”, says Rajnish Kumar, chairman, State Bank of India. Kumar also added, “the facility can be availed after fulfilling certain terms and conditions like the home loan shopper must have an annual income of Rs 6 lakh and will have to pay the interest every month and principal repayment of 3% annually.”
In addition, the facility will not be beneficial for small loans because the interest rates can move up and down as per the repo rate that is decided by the central bank. Incidentally, fixed rates are more popular across the world when compared to the variable rates.