How MCLR will Impact your Home Loan

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Home Loan

Rahul Prakash had availed a Home Loan to purchase a home in the vicinity of his office. He had a high credit score and a clean repayment history which had helped him get a Home Loan at an attractive Home Loan interest rate.

Although he had taken out the housing loan at a low Home Loan interest rates, one fine day, he found that the interest rates that he was paying on the loan capital were too high.

He discussed it the next day with his colleague, Deepak Jaiswal who had taken a similar housing loan and found that he was paying a much higher housing loan interest rate than him.

Initially, he failed to understand the difference in the interest component of his Home Loan and his colleague’s.

He asked Deepak only to find that Deepak had opted for an MCLR Home Loan while Rahul was still on a base-rate housing loan plan.

So, what’s actually the difference and how does it impact your Home Loan? Let’s find out!

What is MCLR?

MCLR is Marginal Cost of Funds-based Lending Rate. The MCLR is a new yardstick for Home Loan interest rate attributed by the Reserve Bank of India (RBI) for creditors. It depends on the Marginal cost of Funds, the Cash Reserve Ratio (CRR), the operational cost of the lenders and premium of the tenor (generally charged by lenders for extended credits). Before taking a Home Loan, you have to check all the factors which related to MCLR-Based Home Loans.

What is the difference between MCLR and base rate?

The MCLR depends on the existing fund costs. For example, XYZ bank lends money from the RBI, other banks, and the depositors. Deposit rates will be lower when compared to what it was at the same time the previous year. The bank’s lending rate from the RBI is lower, and it denotes that ‘cost of funds’ is lesser for the XYZ bank. Hence, the MCLR is on the lower side as well.

On the other hand, base rates depend on average fund costs over time, for example, a 3-month period. Like this, the base rate does not fluctuate much and may not reflect the diminishing interest rates straight away.

As a result, a Home Loan on the MCLR could be cheaper than a housing loan availed at a base rate.

Why is MCLR good for Home Loan borrowers?

MCLR is a good step to take if you want to do a Home Loan balance transfer because it transfers the repo rate changes almost instantly. It means that your cost of Home Loans can go down when interest rate of the market takes a plunge. It also means that your Home Loan EMIs will become lower and reasonably less to help you save.

What is MCLR portability?

If you have an existing housing loan at a base rate of interest, you can always opt for the MCLR portability by paying some charge to your existing lender. The fee could be close to 1% of the total outstanding housing loan amount.

However, before making the switch, you need to ensure if the interest amount that you will save is larger than the transfer fee. If it’s more, the MCLR portability won’t work. It won’t give you saving regarding a less EMI amount.

The Bottom Line

Home Loans could be quite a burden if you don’t handle it properly. You can always keep the burden at bay if you opt for a Home Loan prudently. With MCLR introduction, borrowers can now take the benefit of every alteration in the repo rate of the RBI.