Marginal Cost of funds based Lending rate (MCLR) is a new method introduced by Reserve Bank of India which has replaced ‘Base Rate.’ The Base Rate was introduced by RBI in year 2010 to regulate the lending and borrowing system by different banks in India. The Base Rate was in form till March 2016 after which it was revoked and the new one i.e. the MCLR came. From 1st April 2016, RBI made it mandatory for all banks in India to follow Marginal Cost of Funds Based Lending Rates. Under MCLR the interest rates for different types of customers/borrowers would be fixed. This change will be applied to customers who wish to borrow money from the bank. MCLR would not calculate rate of interest which will be charged to them by the bank.
Introduction to MCLR
MCLR stands for Marginal Cost of Funds-based Lending Rate. The MCLR is not a difficult thing to understand, basically it is a new benchmark interest rate especially for Home loans. It is set by the RBI for the Home Loan borrowers. It basically dependents on the Marginal Cost of Fund, the Cash Reserve Ratio (CRR), lenders operational costs, and tenor premium (which is an extra charge that Banks charge for long tenure loans).
How is MCLR Different from Base Rate?
In MCLR the interest rate charged depends on the Marginal Cost of Lending while in Base Rate it was the minimum interest rate that a bank can charge
Who Sets MCLR?
MCLR it is set by the Banks or the particular lender while Base Rate was set by the RBI.
MCLR is revised approx. every month while the Base Rate was not revised this frequently.
Is MCLR Beneficial for the Home Loan Borrowers?
MCLR is obviously beneficial for the home loan borrowers as it changes with the change in the repo rate almost immediately. This means, your Home Loan interest rate will fall (decrease) easily when the market interest rate falls. This implies, your EMIs will fall too, easing and reducing your financial burden. This can also lead to your CIBIL Score improvement. All these things makes it beneficial for the borrowers.
Is It a Good Decision to Switch your Home Loan from Base Rate to MCLR?
With MCLR there has been a reduction in the interest rates regarding the home loan. Earlier with the base rate the interest rate of a home loan use to be 9% to 10% per annum which has now reduced to 8.35% with the imposition on MCLR. This sudden fall in the interest rates made it easier for the new home loan borrowers to repay their loan as low interest rates has lead to reduced EMIs. But this benefit can only be availed by the borrowers who borrowed after 1st April 2016 as MCLR was introduced on this day. But what about those people who are serving a Home Loan before April 2016? Can they switch their Base rate Home Loan to MCLR?
The answer is YES! One can switch his/her Base rate home Loan to MCLR But there are some points which one should consider before switching their home loan.
Switching a Home loan from Base rate to MCLR is beneficial only when this switching doesn’t cost you much. Every bank imposes a particular amount as the transfer charge when you switch your home loan. One should calculate the total difference between that particular transfer cost and the amount which he /she is going to save by switching the home loan to MCLR from the base rate. If the amount you are going to save is more than the transfer charge then you should definitely go for the switch? Whereas if the amount you are going to save is smaller as compared to the transfer charge then it is not at all worth it to change your home loan.
Let us understand this by an example-
Suppose X takes a Home loan two years back i.e. in 2015 of an INR 30 lakhs. The interest rate he is charged is 10% for a tenure period of 20 years so, the EMI he is paying towards this loan is 35 thousand per month. This is the case when under the base rate. Now he shifts his loan from base rate to MCLR. Under MCLR the interest rate he is offered is 8.35% per annum for the same amount. As a result now he will have to pay only 31 thousand as the EMI for the same loan amount and same tenure period. While the charge that bank took for this transfer was only INR15, 000. So it is a profit case anyhow.
Refinancing is also an Option to you
If you need to get your home loan portfolio, right now running under the Base Rate, changed to MCLR at your bank. After checking the MCLR in addition to the spread, you find that the loaning rate at your current moneylender is higher than what’s being charged at different banks. Try not to stress, you can exchange the outstanding credit with other lender (bank) at a lower financing cost. The procedure by which this is done is known as refinancing.
Cost for Refinancing
When one switch the home loan to another lender, charges such as processing fee, legal charges and others can be imposed. Processing fee charged will be 0.5%- 1% of the transferred amount, in addition to this 0.20%-0.50% stamp duty charge will also be imposed. But when it comes to the switching of a floating rate home loan, it is done with zero foreclosure charges (with some lenders).
So, it would be definitely a wise decision to transfer one’s base rate home loan portfolio to MCL of your bank or other lender, but think wisely for the interest rate which going to be for either of the two options. Think this along with other charges which you have to pay for transferring your home loan from base rate to MCLR.