The economy was hit hard but to bring it back for the past some time now, the Finance Ministry, along with RBI, has been taking various actions. Including many there was one such step known as RLLR which is considered to be great initiative and applauded by economists, finance experts, as well as the end consumer.
Let’s see what RLLR is and why it is being appreciated by one and all, while also focusing on other related concepts.
Home Loan Interest Rates Constitute Of Two Major Components:
- Reference Rate
This reference rate is a benchmark set by the concerned authority to below which banks cannot loan money to the customers to buy a home
There are two types: internal and external. The Internal Benchmark Lending Rate is directly set by the lending institutions (basis guidelines set by the RBI) while the External Benchmark Lending Rate is linked to RBI’s repo rate.
- Spread/ Margin
Spread is also known as margin and it refers to the bank’s profit margin added over and above the reference rate. It is decided on the various factors like the applicant’s credit score, loan amount, etc. So, whenever you decide to look for houses for sale and would like to opt for loans, keep in mind to check the spread.
What Is Repo Rate?
Repo Rate refers to the rate at which any lending institutions/ banks lend money from the RBI. This is the interest that the bank pays when it takes the money from the Reserve Bank of India.
There is a simple concept as whenever there is a cut in the Repo Rate, it becomes cheaper for these banks and institutions to lend money from RBI. Hence, in turn means that they can further lend money to borrowers who wish to take loans for buying property at lower interest rates.
What Is MCLR?
MCLR stands for Marginal Cost of Funds Based Lending Rate that was formulated by the RBI on 1st April 2016. It is the Internal Benchmark Lending Rate that determines the interest rate on loans.
This is the minimum rate at which the banks can loan money to clients who are opting for home loan to buy flats for sale. It is calculated internally by the bank on the basis of four components – Marginal Cost of Funds, Cash Reserve Ratio (CRR), Tenure Premium and Operating Costs.
What Is RLLR?
RLLR stands for Repo Linked Lending Rate that was introduced by the RBI on 1st October 2019. It is the External Benchmark Lending Rate wherein the Repo Rate set by the RBI helps banks and financial institutions determine the rate of interest.
To apprise in a better way: if the repo rate of 6% is reduced by 50 basis points to settle at 5.50%, the RLLR of all banks using external benchmark will reduce by the same 50 basis points.
- Benchmark Linking
MCLR is an internal benchmark of the bank, implying that it is set by the lending institutions/ banks after considering their own cost of funds. RLLR, on the other hand, is an external benchmark that is linked to the repo rate.
- Reset Period
The reset period in the case of RLLR is 3 months and MCLR; it is 6-12 months.
RLLR is more volatile than MCLR as it gets revise every 3 months whereas MCLR-linked home loans are revised every 6/ 12 months.
Hence, before finalising the property for sale, make sure you get home loans after comparing rates. Be cautious with real estate purchase and look for major points like margin and spread that you need to compare before making or not making the switch.