The Reserve Bank of India (RBI) brought changes recently in terms of interest rates and LTV ratio. The RBI has ensured that home loan interest rates run in parallel with its repo rate, which is the rate at which the central bank extends loans to commercial banks to help meet their short-term obligations. That along with the general macroeconomic condition of the country has led to home loan interest rates falling to as low as 6.50% per annum. Can’t remember the last time when the rate was that low. Besides, the RBI’s order assigning risk weights in terms of LTV ratio is seen as a step to improve the efficiency of banks and housing finance companies. Let’s understand these RBI Guidelines for Home Loans in detail.
RBI Guidelines for Home Loans in Terms of Interest Rates
For long borrowers had to pay the home loan at an interest rate not in line with the RBI’s repo rate despite the central bank constantly nudging lenders to do so. It even introduced the Marginal Cost of Lending Rate (MCLR) in 2016 to bridge the gap between the repo rate and the home loan interest rate, which was not possible with the old base rate system.
Although MCLR fared better, the results were far from being ideal. When the RBI cut the repo rate by say 0.25%, the MCLR-based home loan rates used to fall by 0.15% only. However, banks used to raise the interest rate by the same proportion the RBI used to hike the repo rate. With a spread over the MCLR, the gap between the repo rate and the eventual home loan rate was only getting bigger. Transparency was lacking in the way banks used to price home loans.
But not after the RBI introduced the Repo-linked Lending Rate. With that, the interest rates of banks have fallen in the same proportion as the repo rate. Of course, with retail inflation climbing to 6.03% in January 2022, the repo rate may go up soon. That way, the home loan rate will also move up. But looking at how MCLR fared, the repo-linked lending rate is still better.
Does the Repo-linked Home Loan Interest Rate Include a Spread?
Yes, it does include a spread that one gets to see in MCLR too. But the best part is that the spread once decided remains fixed during the entire loan term. Your credit score plays a role in setting the spread for you in the repo-linked home loan interest rate. So, maintain a good CIBIL Score by paying your existing loan or credit card dues on time.
This is unlike MCLR where banks change the rate after a year. While setting the interest rate, banks consider the prevailing MCLR and make a change to the spread too. So, those who are still under MCLR can switch to the repo-linked lending rate system of their current lender by paying a switchover fee. In case the current lender’s rate is still higher than what others are offering, you could do a home loan balance transfer to the new lender.
RBI Guidelines for Home Loans in Terms of LTV Ratio
The RBI made swift changes to the loan disbursal system by issuing an order that the loans with a loan to value (LTV) ratio of 80% and lower shall attract a risk weight of 35%. If the LTV ratio goes above 80% but remains less than or equal to 90%, the risk weight will go up to 50%. These rules pertain to all home loans till March 2022. This is different from the rule brought in by the RBI in 2017 where risk weights were also factoring in the loan amount. Let’s check the table below for a better understanding.
|Loan Amount (In INR)||Risk Weight|
|Up to 30 Lakh||35% for LTV ratio of <80%|
50% for LTV ratio of <=90%
|Above 30-75 Lakh||35% for LTV ratio of up to 80%|
|Above 75 Lakh||50%|