Is Repo rate linked housing loan, a deal-breaker?

Reserve Bank of India (RBI) has subsequently cut the repo rate since February 2019. This has pushed several financial institutions to offer repo rate linked housing loans as it's an effective alternative for borrowers since it becomes more reasonable in case of a rate cut. Further, this would also bring more transparency in the policy transmission. Though few lenders have already introduced repo linked home loans, others are yet to adopt this mechanism.

Repo rates are nothing but the rates at which financial institutions borrow funds from RBI, which the latter uses to keep economic inflation in control.

Currently, very few financial institutions are still going with the marginal cost of funds-based lending rates (MCLR). These rates are calculated based on RBI’s current repo rate. Besides, its calculations are quite complex. Further, MCLR gets influenced by several factors and even lenders reset their lending rates after a specific interval as per their agreement. Hence, even though RBI cuts rate, the end consumers will see a reduction in their equated monthly instalments (EMI) only after adjustments have been done by the lender.

However, we believe that the repo rate linked home loan is a practical way to pace up the transmission process. This would aid consumers to enjoy the advantages of RBI’s actions.

Advantages of repo rate linked housing loan

1. These loans are less expensive simply because the interest is based on the repo rate.

2. No reset clause of financial institutions shall exist henceforth.

3. Interest rates of repo rate linked housing loans shall change immediately on RBI’s actions.

4. Transmission is expected to be much faster.

It is to be noted that borrowers can only avail repo linked lending rates (RLLR) on loans with floating rates of interest option. The change in the repo rate would not affect the fixed interest rates as those are priced differently.