You may have taken a housing loan on an interest rate that at the time of availing the sanction felt easy on the wallet. However, with time, your EMIs may have started to pinch your pocket. If so, now’s the time you can plan a home loan balance transfer to make your home loan repayment more affordable. In order to switch your home loan from the existing financial institution to a new financial institution on easy terms you will need to research a few things, including the MCLR. Marginal Cost of Funds based Lending Rate or MCLR was brought to action by the RBI. This new rate system ensures that your lender cannot charge you interest rates beyond the margin prescribed by RBI. So, understanding the nuances of the MCLR will help you pay more affordable EMIs when you carry out a home loan balance transfer. Here are some points to keep in mind about MCLR.
It requires you to pay a fee
If you are repaying a housing loan on base rate, that means you are on a fixed interest rate plan. In order to switch the loan to the MCLR rate, you will have to shift to the floating interest plan. Understand that shifting from floating to fixed interest rate plans are easy and incurs no extra cost. However, the reverse will incur a fee of up to 0.58% inclusive of service tax on your home loan balance transfer. This is applicable even when you do an intra-bank loan transfer. The bank charges this fee to merely make up for the interest losses they sustain owing to your transfer.
Additional Read: What is MCLR
It is not same as base rates
There is a common misconception that base rates are the same as the MCLR rates. This is a myth because base rate was the minimum rate set by the Reserve Bank of India below which banks were not allowed to lend to its customers. Banks used to add various factors such as margin, overhead costs, operational expenses, etc. to offer you a home loan on a bank rate. This made the home loan interest rates vary across banks. However, MCLR or Marginal Cost of Funds based lending rates, brought to action from April, 2016, refers to the RBI advised minimum interest rate prescribed for a bank below which it cannot lend.
It is only applicable on floating interest rate loans
The MCLR is a rating system that is only linked to the floating rate home loan interest rate systems. Hence, if you want to switch your existing home loan with a lender on MCLR terms then be sure that after the home loan balance transfer regardless of your previous home loan interest systems, you will now be moved to a floating rate system.
It offers you higher transparency on your loan
The MCLR rating system doesn’t permit lenders to exercise their discretion on the interest rate. Switching to MCLR rates via a home loan balance transfer, will allow you to check how much extra interest your lender is including to arrive at your new home loan interest rate. Your lender is only allowed to add a few minimal factors such as margin costs and tenor premium, as per RBI guidelines. Here, knowing the RBI factors and margins will make you a more informed borrower.
It gives you a chance to have a reset period for your loan
Your MCLR-based interest rate is likely to be subject to a reset at regular intervals, because once brought to action, RBI is closely monitoring the margins on a monthly basis. The discretion of the reset period and percentage is solely RBI’s responsibility and only it can take a call of whether to increase or decrease the margin.
Knowing how MCLR affects your home loan interest rate will help you do a balance transfer in a more informed manner. To make the most of low rates you can also do a Home Loan Balance Transfer with a NBFC such as Bajaj Finserv. This way you will be able to avail the benefits of PLR rates on your home loan. The Prime Lending Rate is not linked to the RBI. So, you can negotiate with the lender to get a high amount loan sanction on nominal rate of interest on flexible terms. The lender has the power to decide the interest on which they can allow you a sanction based on your eligibility for the loan. Additionally, you get exciting benefits such as 3-EMI holiday, prepayment and foreclosure on nil charges and home insurance with this loan transfer.
Additional Read: Tax Exemption For Home Loan
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