SBI's new home loan product is transparent, but volatile in nature

State Bank of India, India’s largest bank, announced last week it would offer a product linked to the repo rate from July 1. This is the first big step taken by a large bank tow­ards linking home loan rates to an external benchmark — something that was supposed to begin on April 1 for all banks, but has been delayed. The repo rate is the interest the RBI charges for lending money overnight to banks to help them meet their shortfalls. 

Customers who feel home loan rates should be made more transparent will be happy at this move. Even the RBI has been complaining about the lack of transmission despite three rate cuts. The shortcomings of home loans linked to the marginal cost of funds-based lending rate (MCLR) are well-known. Since this is an internal benchmark determined by the banks themselves, the transmission of rate cuts by the RBI tends to be at the bank’s discretion, and hence slow. As documented by the Janak Raj Committee, banks were quick to revise home loan rates upward when the central bank was raising rates while being slow to reduce them when rates were declining. A home loan linked to an external benchmark takes care of this problem. “The repo rate-linked home loan will ensure faster transmission of rate cuts. And since it will be highly transparent, borrowers will be able to anticipate their home loan rates with greater certainty,” says Ratan Chaudhary, head of home loans, Paisabazaar.com. 

On the flip side, your home loan rate could become more volatile. In the MCLR-linked home loan, if you were on a loan with a longer reset period of six months or one year, you knew your rate would remain unchanged for that period. “Here, there is no reset period. Any change in the repo rate will get passed on to the customer from the next month,” says Aditya Mishra, founder and chief executive officer, SwitchMe, a digital home loan broker. The repo rate is usually revised during the RBI’s credit policy announcements, which takes place every two months, though sometimes it is revised in between also. 

Experts say the quick transmission in this product in a rising-rate scenario should not bother borrowers. “Banks were anyway quick to raise home loan rates in a rising rate scenario,” says Mishra.

All three types of customers — new borrowers, those on SBI’s MCLR-linked home loan, and customers of other banks — need to evaluate this new product. “Borrowers should wait until July 1 to see what spread SBI imposes over the repo rate, and hence what the actual home loan rate for them will be,” says Arvind A Rao, Sebi-registered investor advisor and founder, Arvind Rao and Associates. Rates could vary from one customer to another, depending on their credit profile. “While qualitatively it is a superior, more transparent product, it should also translate into savings on interest cost to be attractive,” adds Rao. He suggests customers should look at their current rates and the cost of shifting, and then calculate if there is a gain to them over the remaining tenure. For SBI’s own customers on the MCLR-linked home loan, there is a one-time 25-bps fee for shifting to the repo rate linked product. “If the interest rate charged by the new product is lower, then it should make sense to shift, especially for those with a larger principal outstanding and a longer tenure remaining,” says Mishra. Chaudhary says borrowers should also be comfortable with frequent rate changes. Usually banks change the tenure and not the EMI. But they also don’t like to extend the tenure beyond the retirement age. If that happens, EMIs can also rise. 

Citibank, too, offers a home loan linked to the 91-day treasury bill. “If you have to decide between these two lenders, compare their interest rates. In addition, go for the benchmark that has been less volatile in the past,” says Mishra.

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