This month, all banks moved to a new lending rate regime—the marginal cost of funds-based lending rate (MCLR). Till March-end, new floating rate loans were linked to base rate. The new rate regime is likely to improve transmission of rates to the end consumers. If you check the current interest rates, MCLR-linked home loans are at least 10 basis points (bps) cheaper than base rate-linked home loans. One basis point is one-hundredth of a percentage point.
What does this mean for your existing home loans? What happens to your other loans such as personal loan, auto loan and education loan?
What is MCLR? It is the new benchmark lending rate at which banks will now lend to new borrowers. Till 31 March 2016, banks used base rate as the benchmark rate to lend. While MCLR will be the benchmark rate for new borrowers, for existing borrowers, the base rate regime will continue. MCLR is closely linked to the actual deposit rates. Banks have to publish at least five MCLR rates (overnight, one-month, three-month, six-month and one-year).
Which loans will get linked to MCLR? All floating rate loans will be linked to MCLR. “This includes home loans, loan against property and many of the corporate term loans. Those such as car and personal loans, which are fixed rate loans, will not be linked to MCLR
How does such a loan function? If you are a new borrower who has taken a floating rate home loan, then it will be linked to MCLR. This means two things: one, you will have a reset clause in the loan documents, and two, you will have a spread.
Through Calculate Home Loan Emi Will it changes the EMI? Usually, the tenor of the home loan will change and not the equated monthly installment (EMI). “When MCLR is reset, the tenure of the loan is altered keeping the EMI amount unchanged.
How can an existing borrower move to MCLR? Currently, these loans are cheaper than base rate-linked loans. All existing home loan borrowers can switch from base rate to MCLR, but this comes at a cost.
Should you switch from base rate? Most banks charge 0.50% of the outstanding principal as switching charges. Some may ask for a flat fee. There will be other administrative costs as well.
What to check for before opting for an MCLR-linked loan? Besides the rate, you need to check the spread for your loans. “In concept, MCLR is not very different from prime lending rate or base rate.
Can one negotiate with the bank on any of the charges? You can negotiate the switching charges and other administrative costs. “Though the bank has a list of charges, most of these can be negotiated.