Home loan strategy 2021: do this to keep the EMI, the interest charge low, as the RBI keeps the repo rate unchanged


As of October 1, 2019, the RBI has mandated banks to offer retail loans such as home and auto loans tied to an external benchmark, which for most banks is the RBI repo rate.

In its first bimonthly monetary policy review of 2021-2022, the Monetary Policy Committee (MPC) RBI kept the repo rate unchanged. However, the interest rate on loans is expected to rise in a few months and any further cuts have been ruled out.

As Citrus Loans reports, the largest lender in the country National Bank of India (SBI) did not extend the low rate offer that was available until March 31. The interest rate for SBI home loans was 6.70% for loans up to Rs 75 lakh and 6.75% for loans in the range of Rs 75 lakh to Rs 5 crore. But, as of April 1, 2021, the interest rate of the SBI home loan is 6.95% and more depending on the loan amount, gender and the borrower’s credit profile.

SBI clarified that the original interest rates from 6.95% were restored as of April 1, 2021 and that, therefore, there has been no increase in loan interest rates. real estate by the bank.

But is that a likely signal that rates could get tougher from here?

The RBI’s move comes at a time when the resumption of economic growth remains elusive and inflation also remains untamed. The political repo rate continues to stay at 4% and the mortgage interest rate is around multi-year lows, with most banks currently offering mortgage loans at around 7% interest rates. .

MCLR Vs RLLR Home Loans

The marginal cost of funds (MCLR) lending rate was introduced from April 2016. Among other factors, the MCLR is based on the bank’s cost of equity. However, since October 1, 2019, the RBI has mandated banks to offer retail loans such as home and auto loans tied to an external benchmark, which for most banks is the RBI repo rate. Whenever RBI revises the repo rate, the interest rate revision is much faster for the borrower compared to MCLR linked loans.

Real estate loan strategy in 2021

Your mortgage lending strategy in 2021 will depend on the type of mortgage loan you are managing – is it based on the marginal cost of funds based lending rate (MCLR) or the repo linked lending rate (RLLR)?

Existing borrowers who have already taken out a loan before October 1, 2019 can continue with their loans tied to the marginal cost of funds (MCLR) based lending rate and not switch to the repo linked lending rate (RLLR). MCLR loans can be converted to RLLR, but one must carefully assess the cost-benefit ratio before doing so. This may incur a cost and therefore take into account the remaining term of the loan before taking this step. Before changing, we can wait a few more months to get a clear picture of the evolution of interest rates. If you are a borrower with a loan linked to the marginal cost of funds (MCLR) lending rate, the lower MCLR will help you pay lower EMIs on your loan as your reset period progresses. will produce.

New borrowers who need a loan now will have to take it according to the bank’s RLLR. Some banks call it an External Reference Rate (EBR). 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 depending on loan amount, profession, gender, etc., the mortgage interest rate is 7%, or even more in most banks. Some of the banks that a new borrower can explore for the best mortgage interest rate include SBI, LIC housing finance, ICICI Bank and HDFC, Kotak Mahindra Bank etc.

Reduce the cost of interest

By lowering the mortgage interest rate by 1% or choosing a low rate lender, the EMI and the total interest charge go down. Choose a lender that offers a low interest rate based on your profile. Let’s take a look at how a 100 basis point or 1% reduction in the mortgage interest rate impacts your IME and the total cost of interest.

Even a 100 basis point reduction can help you save a few lakh in interest charges, depending on the remaining term of the loan. Assuming a home loan of Rs 40 lakh for 15 years, the savings in EMI and interest (on a drop of 200 basis points) will be:

Registered EMI – Rs 4,758 (Rs 57,000 annually)
Total Interest Saved – Rs 8.5 lakh

Another way to reduce the interest burden is to continue to pay off the principal at regular intervals. It is better to prepay every 6 months or on an annual basis so that the principal amount outstanding falls much sooner. Such prepayments should ideally be made during the initial stages of the loan, as interest charges are higher in the early years of the loan. You can use a home loan repayment calculator to find out the amount of savings.

What to do

New borrowers can explore 2-3 lenders and ask for the effective mortgage interest rate based on their loan amount, gender, and loan period. As the repo rate increases, borrowers paying EMI on RLLR linked loans will be impacted much faster than MCLR linked loans. Therefore, remember, whether it is an MCLR or RLLR home loan, keep a prepayment plan on hand to pay off the loan amount as soon as possible. The sooner you pay off the loan, the less the interest burden will be on you.

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