Recently, some leading banks and financial institutes such as Bajaj Finserv have revised their MCLR rate and base rate on home loan such that they benefit all customers. As nearly five years separate the implementation of the two rates, previous benchmarks still determine the loan interest rates of several customers and this is the base rate.
Both MCLR and Base Rate offered by lenders may appear to be similar at first glance. They are loosely based on the same principles, and implemented with similar objects. However, there are crucial factors that differentiate between MCLR rates and home loan base rates.
Home loan base rate is based on average cost of funds. Whereas, home loan MCLR rate is based on incremental/marginal cost of funds.
Base rate is calculated by considering minimum rate of return or profit margin. MCLR rate is calculated by considering tenor premium.
Operating expenses and expenses necessary to maintain cash reserve ratio also govern base rates. Deposit rates, repo rates, operating costs, and cost of maintaining cash reserve ratio govern the MCLR rates.
The current cost of funds determines the MCLR rate. This is in contrast to the home loan base rate, governed by the average cost of funds. The RBI introduced the home loan as the home loan MCLR rates are more conducive to the changes in the policy rates. Therefore, MCLR rates consider the incremental or current cost of funds.
Similar to that of MCLR rates, the calculation for base rate keeps some specific factors in focus. These include the average cost of funds, operating costs, unallocatable overhead costs, negative carry in the cash reserve ratio, margin of profit, and average return on net worth.
Perspective home buyers find the introduction of MCLR home loans very convenient and a whole lot simpler. Therefore, to keep up with the competition, several leading lenders have slashed their home loan MCLR rates, thereby offering their customers attractive home loan interest rates. This is now benefitting home loan customers all over India.
Switching a home loan base rate to home loan MCLR rate is a simple and easy process. However, the applicant must thoroughly research the cost of transfer and the actual benefits they will get. Depending on the bank, the cost of switching may vary between Rs. 5,000 to Rs. 20,000.
Some lenders may offer better home loan interest rates than the current one. In such cases, borrowers may do a home loan transfer by refinancing.