For decades, financial institutions have charged interest on home loans based on Prime Lending Rate (PLR) which was replaced by base rates in 2010. The latter was originally introduced so that borrowers can avail rate cuts as per RBI regulations. Despite the introduction of this system, customers were often unable to obtain the benefits of rate cuts. Consequently, RBI introduced MCLR in 2016 to ensure further borrower convenience.
Recently, financial institutions have started introducing RLLR for increased efficiency; though one needs to understand both MCLR and RLLR to know whether it is ideal for their home loan.
Potential borrowers must understand the vital features of this upcoming Repo-Linked Lending Rate (RLLR) before concluding on if it is ideal or not. Underneath, you will find all the details and features of an RLLR on a home loan.
How Do Repo-Linked Interest Rates Influence a Housing Loan?
Both borrowers and financial institutions are influenced by changing RBI directives. With convenience to customers being the primary aim, the RBI Repo rate cut and what to expect from the announcement became very important. Check out the basic influences of RLLR on housing loans mentioned below.
- Availing Rate Changes Promptly
For years, from PLR to base rates and then MCLR, financial institutions have had trouble in regularising change in interest rates despite RBI guidelines. In most cases, rate cuts take longer time to come into effect. On the other hand, in cases of hike in interest rates, financial institutions and NBFCs would be comparatively prompt to raise their interest rate on home loan advances.
Primarily, RBI lends money to financial institutions at the repo rate. Under the new directive, RBI intends to enforce immediate change in interest rates with alterations in the repo rate for all borrowers. Customers who are nearing the end of their loan tenor might be at a disadvantage in shifting to RLLR if there is a sudden rise in its rate.
Along with RLLR, borrowers need to know about MCLR based home loans to decide the best option for their debt repayment. MCLR or Marginal Cost of Funds based Lending Rate typically transmits changes in rates promptly to customers. Under this system, the rate of interest on home loan changes when RBI introduces detailed guidelines based on the financial spread. Typically, the rate is restored to its original value if there is no further financial spread. In the case of a repo rate, RBI guidelines directly influence the rate of interest.
While it introduces transparency, on the one hand, MCLR assures that interest rate can be restored to the initial rate. As for RLLR, it has a direct relation to RBI directives and its lending rate.
- Change in Overall Expense
Both RLLR and MCLR influence the expenses that customer bears. Under RLLR, this change is instantaneous while it takes some time for MCLR-based interest rates to change. Individuals nearing the end of their loan tenor should especially check this point. Often, it can be best to let the home loan interest rate remain unchanged with just a few EMIs left to pay.
Customers who have decided on the type of interest they want on their housing loan can easily complete the application in a few hours. Once all home loan eligibility is fulfilled and documents arranged, the online application takes only a few minutes with lenders like Bajaj Finserv.
Now, customers must calculate their overall expenses in repaying a home loan. While both MCLR and RLLR offer numerous benefits, borrowers can aptly decide the ideal option for themselves by understanding how these rates influence their housing loan and their impact on EMI.