In the current global financial environment, the Reserve Bank of India (RBI) has kept the repo rate at 6 percent. of the total down from 8% recorded in April last year to 5%. However, several executives are increasing this Marginal Cost of Fund-Based Lending Rate (MCLR because of augmented funding costs. For homeowners who have taken a loan that is pegged to MCLR, this will imply higher Equated Monthly Instalments (EMIs) to be paid. To circumvent these rising costs, it is advisable to shift to a Repo-Linked Loan Rate (RLLR) for home loans as the cost-benefit could be enormous as the repo rate has already bottomed out and is expected to be lower.
Why the Use of Repo-Linked Loan Rate Is Rational
To elaborate, a loan can be restructured from MCLR to RLLR and this leaves borrowers with significant interest savings. As it may be seen from the formula of RLLR, by using this system, the passing on of changes in interest rates is faster especially when the rates are being lowered. Then there is the MCLR where the transmission can be somewhat slower than with the SB rate due to various considerations such as operation costs and tenure premiums. RLLR also has the advantage of being more transparent and thus borrowers are more able to track changes that may occur.
However, borrowers should look at other expenses that come with the change before making the switch. Such costs may hence include a processing fee of 0. Legal and stamp fees constitute 5% of the outstanding loan balance, mortgage registration fees amount to 1% of the granted loan, and valuation and title clearance fees.
MCLR vs. RLLR: To answer the age-old question, ‘What’s the difference’, this paper shall seek to define the differences between the following related concepts;
This control is done as and when the lender wants, based on the loan tenor and conditions of the contract between the lending and borrower institutions. Speaking for AZUKE Personal Finance Advisory, Chaitali Dutta while expecting RBI to soon cut the repo rate, suggested that moving to an RLLR-linked home loan would be a good strategy.
RLLR is far easier to understand since it is benchmarked to the RBI’s repo rate. For example, if a bank has chosen the repo rate as its reference rate by which to move, the RLLR will respond almost instantaneously to repo rate changes. This means that the borrowers can cut the cost of borrowing from the time that the repo rate has been adjusted.
Repo-Linked Loans: The New Loan Offering with Growing Patronage
Starting from 2019, the extended types of credit products that are linked to RLLR have been proposed to new clients. They are normally availed at a base rate that is lower than the MCLR base rate of the lending institution. For this reason, the share of MCLR-linked loans has reduced from 46. 5% in June 2022 to 38. 5 per cent by this March of the year.
The CEO of these 3 sites is; Adhil Shetty the CEO of Bankbazaar. com, mentioned that during a low repo rate, RLLR-linked loans look a lot more attractive and that means lower EMIs or shorter tenure of the loan. This could be very useful for borrowers who would want to bereave themselves of the extra financial pressures in the event they are offered the loans.
Potential Drawbacks: Another group of observers considers the possibility of banks raising the spread
The repo rate is set by the RBI and the RLLR is a rate set by each bank, but within a specific range, the banks are free to fix the spread they want to add to the repo rate. As the cost of funds rises this spread may be adjusted by the banks to adapt to the potential profit loss and this may see new loans being floated at higher RLLRs.
But as Adhil Shetty points out, otherwise competitive pressures push banks to provide fuel to keep existing borrowers happy and to attract new ones. However, if funding costs increase then, the spread can change due to market competition.
Conclusion: When It Is Wise to Change the Learning Rate: RLLR for RNNs
It might be a wise move to shift to an RLLR-linked home loan – if you are keen on a lower interest charge. Nonetheless, any cost incurred in the course of implementing RLLR must be considered and the possibility of the spread of RLLR by the banks must also be factored. Thus, it is possible to be informed and make the most suitable decision about your financial future.
