Sanket Chandra had taken a Home Loan to buy a house near his office. But gradually, he realised that the interest rates were too high and he was paying more interest than his colleague, Sahil Jha.
Sahil had taken a similar loan, yet seemed quite relaxed about his loan repayment. Sanket, on the other hand, found it hard to make ends meet. Sanket wanted to find out the key differentiator. He finally asked Sahil.
Sahil told him that this was because he opted for an MCLR-based Home Loan. Sanket, meanwhile, remained on a base rate-based loan.
So, what is the difference? Let’s find out.
What is MCLR?
MCLR stands for the Marginal Cost of Funds-based Lending Rate. The MCLR is the new benchmark interest rate for Home Loans set by the RBI for lenders. It is usually dependent on the Marginal Cost of Funds; the Cash Reserve Ratio (CRR), lenders’ operational costs, and tenor premium (which is an extra charge that lenders charge for longer loans).
How is MCLR Different from Base rate ?
The MLCR is based on the current cost of funds. For example, ABC Bank lends money from depositors, the RBI and other banks. Deposit rates are now lower than it was at the same time last year. Even the rate at which banks lend from the RBI or each other is lower. This means the ‘cost of funds’ is lower for ABC Bank. Thus, its MCLR is lower too.
Base rates, meanwhile, are based on the average cost of funds over a period of time, say a quarter. So, this way, the Base rate does not fluctuate as much. It, thus, may not be reflect the falling interest rates immediately.
A home taken on the MLCR can, thus, be cheaper than a Home Loan taken on the Base rate.
How is it Beneficial for the Borrowers?
MCLR is profitable as it transfers the change in the repo rate almost immediately. This means, your Home Loan costs can fall easily when the market interest rates fall. This means, your EMIs can fall too, easing your financial burden. This can then improve your credit score. This makes it a transparent and more efficient option as compared to a Base rate system.
Here are few things you need to know as you consider the MCLR for your Home Loan:
- Linked to the Floating Interest Rate
Every time you apply for a loan, your lender would offer you two options – fixed interest rate or floating interest rate. If you choose fixed, you get a fixed interest rate for the entire tenure. However, if you choose a floating interest rate, your interests get influenced by the changes in the market. MCLR affects the floating interest rates. These include Home Loans, Loan against property and Business loans. However, if you opt for a fixed rate loan, then you can refinance your loan after a certain time to avail a lower interest rate.
- Reset Clauses Differ from Lender to Lender
According to the RBI guidelines, all the financial institutions need to submit different MCLR rates for different tenures. This includes overnight, one month, three months, six months, one year, two years, and three years. These are the reset clauses and depend on the tenure of the loan. This ensures your loan interest amount is revised after the given period. For example, if you have a loan with a tenure of 15 years and your lender has a reset clause of one year; your interest rate could be revised every year.
- EMIs Can Remain Unchanged
If in an MCLR Home Loan, your interest rate changes, your Equated Monthly Instalments (EMIs) can remain unchanged. In this case, the change impacts the tenure of the Home Loan and not the amount of EMIs. Then, you pay off more of your principal amount in every EMI. This leads to a lower tenure. It, thus, helps you reduce your total interest cost. However, this is not a rule. You can opt to change your EMI as per the new interest rate. This means, your tenure will remain the same.
- Portability to MCLR
If you already have a Home Loan with the base rate interest, you need not worry. You can always switch to MCLR by paying a fee to the lender. This fee is usually nominal, as compared to the benefit of the MCLR system. Calculate the new interest charges and fees before you switch. Ensure it is less than your present interest rate.
Home Loans can be quite a burden for anyone. But you can ease this burden if you choose your Home Loan wisely. With the introduction of the MCLR, borrowers can now benefit from every change in the repo rate that the RBI makes.
Read this post: to know more about MCLR base Home Loan