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    Top 5 banks' home loan interest rates

    Synopsis

    The Reserve Bank of India has directed banks to link their lending interest rate to an external benchmark rate such as repo rate. The aim is to provide greater transparency and faster transmission of changes in the policy rates.

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    RBI, in its circular, has asked banks to reset the interest rates linked to an external benchmark at least once every three months.

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    With effect from October 1, 2019, as per mandate by the Reserve Bank India (RBI), banks have to link interest rates on all retail loans, including home loans, to an external benchmark rate. Scheduled commercial banks (except regional rural banks), local area banks and small finance banks have to follow this mandate.

    As per the directive, banks can link their retail lending interest rate to any one of the four external benchmarks mentioned in the circular.

    RBI has asked banks to link their lending interest rates to any of the four external benchmarks:
    • RBI's repo rate
    • Government of India 3-months Treasury bill yield published by Financial Benchmarks India Pvt. Ltd. (FBIL)
    • Government of India 6-months Treasury bill yield published by FBIL
    • Any other benchmark market interest rate published by FBIL

    Most banks have opted to link the interest rate on loans to RBI's repo rate. A bank's interest rate linked to the repo rate is called Repo Rate Linked Lending Rate (RLLR). The bank arrives at its RLLR by adding a spread or margin to the repo rate.

    RLLR = Repo rate + Margin or spread

    The repo rate is subject to review and revision in every two months by the Cental Bank.

    Apart from the margin, banks' can also charge risk premium from the borrowers on the home loan taken by them. Though spread will remain the same for all home loan borrowers of a particular bank, the risk premium will vary. Usually, it is seen that banks charge higher interest rates on loans to self-employed customers compared to salaried borrowers.

    Top 5 banks offering lowest interest rate on home loans to salaried individuals
    BANK NAME RLLR Minimum Interest Rate (%) Maximum Interest Rate (%)
    Kotak Mahindra Bank 6.75 6.75 8.35
    Union Bank of India 6.80 6.80 7.35
    Bank of Baroda 6.85 6.85 8.20
    Central Bank of India 6.85 6.85 7.30
    Axis Bank 6.90 6.90 8.40
    **Sorted on minimum interest rate charged by the bank after adding risk premium
    *Kotak Mahindra Bank charges a processing fee of max 2% + GST and any other statutory charges plus documentation charges up to Rs.10,000/-
    *Union Bank of India charges a processing fee of 0.50% of loan amount, Max. Rs 15000

    *Bank of Baroda processing fees is 0.25% to 0.50% of loan; Min. Rs.8500/- Max. Rs.25000/-
    *Central Bank of India charges 0.50% processing fee subject to Max Rs 20,000
    * Axis Bank charges up to 1% of the loan amount subject to a minimum of Rs 10,000.


    Top 5 banks offering lowest interest rate on home loans to self-employed
    BANK NAME RLLR Minimum Interest Rate (%) Maximum Interest Rate (%)
    Kotak Mahindra Bank 6.75 6.85 8.45
    Union Bank of India 6.80 6.85 7.40
    Bank of Baroda 6.85 6.85 8.20
    Central Bank of India 6.85 6.85 7.30
    Canara Bank 6.90 6.95 8.90
    **Sorted on minimum interest rate charged by the bank after adding risk premium
    *Kotak Mahindra Bank charges a processing fee of max 2% + GST and any other statutory charges plus documentation charges up to Rs.10,000/-
    *Union Bank of India charges a processing fee of 0.50% of loan amount, Max. Rs 15000

    *Bank of Baroda processing fees is 0.25% to 0.50% of loan; Min. Rs.8500/- Max. Rs.25000/-
    *Central Bank of India charges 0.50% processing fee subject to Max Rs 20,000
    * Canara Bank charges 0.50%; minimum Rs 1500 and maximum Rs 10,000.


    All data sourced from Economic Times Intelligence Group (ETIG)

    Data as on Jan 21, 2021

    Factors that will impact changes in your home loan EMI
    There are three factors that can impact the amount of equated monthly instalment (EMI): Changes in the external benchmark rate, spread (margin) charged by your bank and risk assessment done by your bank.

    RBI, in its circular, has asked banks to reset the interest rates linked to an external benchmark at least once every three months. Therefore, in case of any change in the external benchmark, for instance, repo rate in the above table, then banks will also have to change the interest rate they are charging you for the loan taken.

    Also Read: How borrowers EMI will be reset if loan is linked to external benchmark

    Second factor that will impact the interest charged on the loan by a bank will be the spread (margin) charged by the bank. If the external benchmark is unchanged, for e.g. repo rate, but the bank hikes margin it sets above the external benchmark rate, then it would impact the interest rate charged on the loan.

    Another factor that will impact your EMIs is the risk group you come under. Some banks have internal risk assessment teams that categorise borrower's risk group. On the other hand, some banks rely on the credit score given by the credit bureaus to assess the risk grade of the borrower.

    For instance, for a home loan taken under SBI Max Gain, the bank can charge a premium of 10 bps (100 bps = 1 per cent) from a customer falling in the risk grade of 04 to 06. Thus, it is important to have good credit score while taking a home loan so that your bank charges a lower risk premium from you.

    Also Read: 5 lesser known facts that lower your credit score

    Remember as per the RBI circular, if your credit risk undergoes any major change during the tenure of the loan, then the bank can revise the risk premium charged from you.

    Why RBI took this decision
    The central bank has directed banks to link the interest rate on retail and MSME loans to an external benchmark rate in order to provide greater transparency and faster transmission of changes in the key policy rates. Under the previous marginal cost-based lending rate (MCLR) regime, home loan borrowers often complained about banks quickly raising interest rates when RBI raised key policy rates but rates were not cut in the same rigour when RBI reduced the repo rate.

    For any queries or changes, please write to us on etigdb@timesgroup.com or call us at 022 - 66353963
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    1 Comment on this Story

    Vijai Sastry420 days ago
    Each bank must form a "home loan borrowers'' association, which monitors timely repayment and advices rebate on interest when loan is closed. This encourages commitment from borrower and banks social responsibility through the association. The association could publish list of defaulters, after members warn of their concern.
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