As dictated by the Reserve Bank of India, all floating-rate personal and retail loans sanctioned on or after 1st October 2019, will have to be linked with an external benchmark like repo rate. Since this measure will directly impact home loan interest rates and thereby house loan EMI outgo, borrowers should have an understanding regarding how it works.
Repo rate linked lending was introduced in place of the internal benchmark to bring in more transparency in interest calculation system. In this case, the interest rate on home loans will be linked to the financial institution’s repo rate based lending rate.
Whenever RBI revises the repo rate, the changes will be directly reflected on the RLLR. Financial institutions will also charge a spread over the repo rate linked lending rate, which will be calculated according to borrower’s risk profile and the loan amount.
In case of repo rate-based lending rate, the principal payment amount remains fixed for the entire term, and interest payment will vary for every month. The interest outgo will be highest in the first month, and then it will keep on reducing.
For instance, if the principal amount is Rs.10,000 and interest component is Rs.15,000 for a repo rate linked home loan, then as per amortisation schedule, a borrower will be paying Rs.10,000 towards principal repayment throughout his/her loan period. Therefore, in RLLR based home loans, the house loan EMI will be less compared to internal benchmark linked loans.
