MCLR is the acronym for Marginal Cost of Funds based on Lending Rate. MCLR based home loan is the lowest interest rate a bank or non-banking finance company such as Bajaj Finserv can offer. Most banks are unable to offer home loan interest rates lower than home loan MCLR rates. However, the Reserve Bank of India can make certain exceptions.
Home loan MCLR rates are closely linked to repo rates and fund costs of the lender. Therefore, any change in the repo rate will affect the floating rate of interest on a home loan. If the lender brings down the home loan MCLR rate, the floating home loan interest rate will also fall. Although this will not affect the EMI, it will affect the tenure of the loan.
With MCLR, borrowers can benefit from the repo rate cuts by the RBI. This makes the banking system more transparent. Base rate is the minimum rate of interest that lenders offer for loans to their customers.
MCLR depends on factors such as operating costs, tenor premium, marginal cost of funds, and cash reserve ratio (CRR). Base rate depends on various factors such as bank costs, bank deposit rates, profits, etc.
MCLR depends on the changes RBI makes to the repo rate. The base rate is independent of the repo rate the RBI sets.
MCLR can vary for different loan tenures. Lenders can choose to change the base rate quarterly.
For calculating the current MCLR rate, the bank must consider all their borrowing sources. For example, a bank may borrow from different sources such as savings accounts, current accounts, fixed deposits, etc. They use the rate of interest in these borrowing sources for calculating the MCLR. They also consider the return of equity for the calculation, as the funds of a bank are not only the borrowings, but equity as well.
Borrowers decide to switch to MCLR based home loans from base rate depending on the actual benefits and transfer costs they would be receiving. Lenders levy their own charges for the switch. Some banks do not charge anything for converting home loans to MCLR. Therefore, by spending a few thousand, borrowers can convert their base rate home loans to MCLR based home loans and benefit hugely in the long run.
Lenders offer home loan MCLR rates at only floating rates. If the borrower had opted for a home loan with a fixed rate of interest, MCLR may not affect the home loan. Whether the borrower will stand to gain or lose will depend on the changes in repo rate. Current MCLR rates in India are following a downward trend. Therefore, those planning to purchase a house can take advantage of switching to MCLR home loans.
RBI guidelines state that MCLR will not affect the fixed rate home loans. While computing the marginal cost of funds, lenders have to consider deposit balances and other borrowings. Banks must publish their MCLR for different tenors. MCLR on the sanction date of the floating rate home loan will continue until the next reset date.
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