14 Mar 2018 19:49 IST

Rate hikes and new home loan products

What borrowers need to know about benchmark rates and their changing dynamics

Just when the home loan market was getting the hang of the two-year-old benchmark rate — the marginal cost of funds-based lending rate (MCLR) — yet another one has slipped into the market, leaving borrowers flummoxed.

Citi India was the first to launch a home loan product linked to the three-month Government of India Treasury Bill benchmark rate. Home loans for customers opting for Citi India’s new product will be priced based on the three-month T-bill rate published on the 12th of each month by Financial Benchmarks India Pvt Ltd. These rates will be reset or revised every quarter.

This article explains the contours of the product and strategies one can follow to make the best of the home loan deals available in the market.

Where it scores

The key issue with earlier rate structures, such as MCLR or base rate, was that each bank decides its benchmark rates — against which lending rates are benchmarked — based on its costs and profitability. Hence, banks’ rate actions could not follow a harmonised pattern and there were delays in transmission. While MCLR — under which banks have to calculate their cost of funds based on the latest rates offered on deposits or borrowings — did help a bit, it did not address the transmission issue entirely. In fact, much of the fall in lending rates was triggered post demonetisation, due to the surplus liquidity.

By mooting an external benchmark, the RBI has been looking to iron out some of these issues. As the rate will be market-linked, policy rate changes will get reflected faster, leading to better transmission.

Citi India’s newly-introduced product, hence, scores on transparency and better transmission. The only hitch is the current direction of interest rate movements in the economy.

Quicker resets

It is only natural that in a rising rate cycle, such as now, borrowers are unlikely to be pleased with quicker transmission. In the past too, while banks have been tardy in passing on rate cuts, they have been surprisingly nimble in passing on rate hikes to borrowers. An external benchmark that is quick to respond to policy rate changes will only hurt borrowers more.

Citi India’s home loan rate will be reset more frequently — every quarter — than most home loan products under MCLR offered by other leading banks. Under the MCLR-based pricing, lending rates are reset only at intervals corresponding to the tenure of the MCLR. In the case of home loans — they are benchmarked against the one-year MCLR in most banks — lending rates are reset only once a year.

Best deals

Savvy borrowers who like transparency in rates and can take a bit of volatility may find Citi India’s product favourable.

The biggest draw for the product is its effective lending rate that compares well with other products in the market under the MCLR structure.

As per the information available on Citi India’s website, the interest rate resets of the T-Bill-linked home loans are on March 1, June 1, September 1 and December 1. The T-Bill benchmark-linked lending rate as of February 12, 2018, stands at 6.25 per cent. Currently, the T-Bill rate is around 6.3 per cent. With a spread of 1.95 per cent to 2.7 per cent on this (based on the website), the effective lending rates could work out to 8.2-8.95 per cent.

Borrowers with a higher credit score and hence lower spread may enjoy a lower effective lending rate under T-Bill home loans than MCLR to begin with.

For loans up to ₹75 lakh, Indian Bank offers 8.25 per cent on home loans. Allahabad Bank, Bank of India, Union Bank of India and Central Bank of India charge 8.3 per cent. SBI, after its recent hike in MCLR, charges 8.55 per cent.