Marginal Cost of Funds-based Lending Rate (MCLR) is the new benchmark of an interest rate for home loans set by RBI for lenders. MCLR is usually dependent on the Marginal Cost of Funds, tenor premium, Cash Reserve Ratio (CRR) and lenders’ operational costs. MCLR is based on the current cost of funds. It means that as the deposit rates are now lower than the last year, the rate at which banks lend from RBI is lower too.
Thus, its MCLR will be lower too. Also, the base rate does not fluctuate as much as they are based on the average cost of funds over a period and may not reflect the falling interest rates immediately. This is why a home loan taken on MCLR can be much cheaper than the one taken on a Base Rate.
How Does it Benefit the borrower?
MCLR transfers the change in the repo rate immediately; thus your property loan cost can fall easily when the market rate falls. It can ease your financial burden by lowering the EMIs and improving your credits.
Things to know before MCLR for Home Loan:
1. MCLR affects the floating interest rates
The lender will offer you two options whenever you apply for a property loan. The first is a fixed interest rate and the second is a floating interest rate. A fixed interest rate allows you the ability to refinance the loan after a certain time to avail low-interest rate. On the other hand, a floating interest rate makes your interests get influenced by changes in the market.
2. Different MCLR rates for Different Tenures
RBI guidelines state that all financial institutions need to submit different MCLR rates for different tenures and this tenure can go from one month to three years. These reset clauses depend on the tenure of the loan, making your loan interest amount revised after a given period.
3. Changes EMI as per the new interest rates
In your MCLR housing loan, if your interest rate changes, your EMI can be changed or can remain unchanged. The shift impacts the tenure of the home loan and not the EMIs. This leads you to pay your principal amount in every EMI making the tenure lesser. Or you can simply opt to change your EMI schedule as per the new interest rates.
4. MCLR portability
You can always switch to MCLR by paying a fee to the lender even if you already have a home loan. Calculating the new interest charges and fees before switching will ensure that it is more affordable than your present interest rate.
With MCLR, borrowers can now benefit from every change in the repo rate that RBI makes.