Personal Finance

Taking a new home loan? A look at what’s on offer

Radhika Merwin BL Research Bureau | Updated on October 30, 2019 Published on October 30, 2019

Many banks offer relatively cheaper lending rates to borrowers with a good credit record   -  V_RAJU

Nearly all banks have adopted RBI’s repo rate as the benchmark, but charge different spreads

Wanting to take a home loan, but sitting on the fence, waiting for the dust to settle on the newly-launched repo-linked home loans? Then it’s time to quit the wait and home in on the best deals in the market. Post the RBI mandate, all banks have linked their home loans to external benchmark (repo rate) from October. Many banks have also set varied rates across different category of borrowers based on their risk profile or credit score. Hence, if you have been a disciplined borrower and have a high credit score, the deal can get sweeter for you.

A look at what’s on offer.

Understanding repo-linked loans

 

Home loans are broadly of two types — fixed and floating. Often, borrowers who prefer predictability in their EMIs, opt for fixed home loans, as lending rates remain constant through the tenure of the loan. But pure fixed rate home loans charge a high premium for their predictability and may be avoided in a falling rate scenario.

Under floating rate loans, lending rates move up or down based on the interest rate movements in the broader economy. Up until now, floating rate home loans were linked to bank-specific benchmark — MCLR (marginal cost of funds-based lending rate). To address the issue of weak transmission (the RBI’s 135 basis points cut in repo rate resulting in just 30 basis point reduction in lending rates), the RBI mandated that banks link their loans to external benchmark such as repo rate with effect from October 1. This would ensure faster lending rate cuts or hikes.

But borrowers need to watch for the spread that each bank charges. Whether it is MCLR or repo-linked loans, banks arrive at the final effective lending rate after adding a mark-up to the benchmark. Hence as a borrower, you should note the spread the bank charges to you, before deciding on the loan. This will ultimately determine your effective lending rate or in other words the EMI you have to pay on your home loan.

Currently, while nearly all banks have adopted repo rate as the benchmark, there is a vast difference in the spread charged by each of them. Hence some home loans are cheaper than the others (though future repo rate cuts by the RBI may result in reduction in lending rates by a similar quantum across these banks).

So which banks offer a good deal?

What’s on offer?

Currently, most banks’ websites disclose lending rates based on repo rate of 5.4 per cent (before the RBI’s rate cut of 25 bps on October 4) — SBI, Axis Bank, Central Bank of India, Corporation Bank etc. It is unclear when the latest repo rate of 5.15 per cent will become applicable to compute the final lending rates on these loans. Few leading banks in their interaction with BusinessLine, failed to offer clarity on this, while others mentioned that the changes would reflect from November.

Hence for our analysis we have taken the effective lending rates given on the banks’ websites as on October 30. Do cross-check these rates before deciding on the loan.

For a salaried borrower (male), looking for loans in the 30-75 lakh bucket, Bank of Baroda, Bank of India, Central Bank of India, and Union Bank offer among the cheapest rates in the market. The best effective lending rates on these home loans range between 8.1-8.25 per cent. SBI (8.45 per cent), Axis Bank (8.85-9.3 per cent) and ICICI Bank (9.05-9.2 per cent) charge a relatively higher lending rate.

As mentioned earlier, lending rates vary across banks owing to different spreads charged by them. For instance, Bank of Baroda charges 2.95 per cent mark-up above repo rate, SBI charges a spread of 2.65 per cent over repo rate. Union Bank adds a spread of 2.85 per cent over the repo rate while ICICI Bank and Axis Bank charge a minimum of 3.9 per cent and 3.45 per cent over the RBI’s key repo rate, respectively.

Hence, aside from looking at the final effective lending rate, note the spread charged at the time of taking the loan. Banks are not allowed to make ad hoc changes to the spread during the tenure of the loan, as long as the credit profile of the borrower remains the same.

Higher the credit score, cheaper the rates

Aside from the fixed mark-up over the benchmark repo rate, banks may also charge an additional spread based on the risk profile of the borrower. Hence you may be able to avail cheaper home loan rates if you have a high credit score.

For instance in case of Bank of Baroda, you may be charged nil to 1 percentage point risk premium based on your credit score. Hence your effective lending rate may vary from 8.1-9.1 per cent. In case of Union Bank, if your CIBIL score is 700 and above you are charged a premium of 0.2 per cent; for a score below 700 the premium charged is 0.3 per cent. Hence the effective home loan rate varies between 8.2-8.3 per cent. In case of Bank of India, a CIBIL score of 760 and above implies a 0.1 per cent spread, while for a lower score of 675 to 724 you would be charged a higher premium of 0.4 per cent.

Each bank may charge a different premium based on your credit score. Hence, it is important to take note of it. Also, ensure that the risk premium charged is based on transparent credit bureau scores, rather than opaque internal bank policies.

Published on October 30, 2019
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