The State Bank of India is the first bank to have come out with a repo-linked home loan scheme after the Reserve Bank of India (RBI) made it mandatory for all banks to offer external benchmark-linked floating loan products from October 1.

SBI had introduced floating rate home loan products on July 1. However, it was discontinued and re-launched after few modifications to comply with latest regulatory guidelines.

As this is a new product targeted at increasing the transparency in the interest rate fixing mechanism, as a borrower you must know what all will change from the next month. The new home loan offering is timely as it synchronises well with festivities, the time of the year when higher number of people prefer buying houses.

Setting the industry trend

The SBI being the largest mortgage lender in the country has set the trend. Most of other banks are expected to follow suit. The product will give you an idea about how the banking system will respond to the RBI mandate to link their floating loan rates to one of the external benchmarks published by Financial Benchmarks India Private Ltd (FBIL).

Spread over external benchmark

The most crucial part to know about the new loan is the spread that a lender may charge over the external benchmark. SBI has decided to keep the spread at 2.65 per cent. Currently, the repo rate is 5.40 per cent. So, the SBI will have external benchmark rate (EBR) of 8.05 per cent.

Interest rate for borrowers

If you are a male salaried borrower taking a floating rate term loan up to Rs 30 lakh for a home, you will have to pay an effective interest rate of 8.20 per cent, 0.15 per cent more than EBR of 8.05 per cent. In case of a female borrower, the bank is giving a concession of 0.05 per cent. As a result, female borrower will get the same loan at 8.15 per cent. Additional 0.10 rate will be charged if your loan to value (LTV) goes above 80 per cent. The maximum LTV allowed is 90 per cent.

For loans between Rs 30 lakh to Rs 75 lakh SBI is charging Rs 0.40% over the EBR. So a salaried male borrower will get the loan at 8.45% while female borrowers will get it 8.40%.

For the loans above Rs 75 lakh, the bank will charge an interest rate of 8.55 per cent from the salaried male borrower while 8.50 per cent from salaried female borrowers.

For non-salaried borrowers the bank will charge additional 0.15 per cent interest rate. The lender will also charge additional 0.10 per cent from borrowers falling into Risk Grade (RG) 4-6 that is considered riskier.

Repo Rate as the benchmark

SBI has selected repo rate as its external benchmark, which is significant as there were multiple options such as three-month and six-month treasury bills or any other benchmark rate published by FBIL. While many other rates change frequently, repo rates are reviewed (and changed, if required) during bi-monthly meetings of Monetary Policy Committee of the RBI. As the minimum reset period to adjust the lending rate is three months, any change in repo rate will not be immediately passed on to borrowers.

Easier to track future changes in interest rates

Once the spread is decided, it can only be changed after a gap of three years. So, borrowers can easily calculate the changes in their effective interest rates as per the changes in the repo rate. If the repo rate falls by 0.25 per cent, their home loan interest rates will go down by 0.25 per cent by the beginning of the next quarter.

Besides the spread, the bank is also allowed to change the interest rate if the risk profile of a borrower goes through a substantial change, which is unlikely to happen with most of borrowers.