MCLR or Marginal Cost of funds based Lending Rate refers to the lowest possible interest rate which a lender or bank can offer to its customers. No bank in the Indian financial structure can provide loans at rates lower than the MCLR rates. Exceptions to same can be approved by RBI only. The MCLR based lending system came in to being in the year 2016 replacing the base rate system which was introduced in the year 2010.

MCLR has an effect on loans which are borrowed at floating rates of interest only. Loans taken on fixed rates are unaffected by the change in MCLRs.

How to ascertain whether your loan is subject to the base rate or MCLR?

  • It is important to note the date of Home Loan sanction. If your Home Loan was sanctioned prior to 1st of April 2016, it is bound to be sanctioned on the base rate.
  • It is also important to take note of the reduction in the rate applicable to you. Fixed-rate loans (based on base rate) are generally expensive than floating rates (based on MCLR). For, the MCLR based loans fluctuate as per the RBI repo rate.

Currently, a majority of borrowers opt for MCLR based floating rates. For, with falling benchmark lending rates, the EMI on MCLR based Home Loans all fall. That is, with every fall in the RBI’s benchmark lending rate your Home Loan EMI is going to become more affordable. However, the change comes in effect from the reset date of the loan. The new Home Loan customers can enjoy reduced rates.

Still a lot of customers opt for fixed-rate loans as they find it less stressful to pay a fixed home loan EMI throughout the tenor. Thus your bank would give you an option to choose from fixed and floating rate. In many cases, customers decide to switch between the tenure. Let’s understand deeper in this article, what all entails when you switch from a base rate to MCLR for Home Loan.

An illustration: Saving with the shift from base rate to MCLR

Mr. Acharya Vyaas has borrowed a Bank of Baroda Home Loan for Rs. 20 Lakh for a tenure of 20 years at a fixed rate of 9.95% p.a. He continues paying EMIs associated with the said home for the next 3 years. The EMI stands Rs. 19,234. This results in a payout of Rs. 5,81,757 on account of interest.

If he continues with the same loan for the loan tenor, he would end up paying an amount of Rs. 26,16,214 at the end of the tenure of 20 years. In case, he decides to shift his loan to MCLR base, say Indiabulls Home Loan at the rate of 8.55% p.a for the remaining period of 17 years.

At the new rate, Mr. Vyaas would pay Rs. 17,00,198 on account of interest over the period of the next 17 years.

Hence the total outflow on account of interest would amount to (5,81,757+17,00,198) or Rs. 22, 81,955. This would ideally mean a saving of Rs. 3,34,259 on account of switching the Home Loan Interest Rate from base rate to MCLR.

Factors to evaluate when shifting from base rate to MCLR

As attractive the switching from base rate to MCLR may appear, there are certain factors you must keep in mind before you opt for the same.

  • You do not know how the base rate and MCLR would change in times to come.
  • It is not certain whether the interrelation between MCLR and base rate would remain the same or whether it would change in the future.
  • Whether it would be justified to pay the fees which would be accompanied with GST thereon. You would actually feel the pinch of processing fees for the switch. The EMI saving would follow over the remaining tenure of the loan.

As per directives issued by RBI, a bank has to allow its customers with an option to switch over from base rate to MCLR regimes. But it is recommended to do Cost-Benefit analysis. When you switch from base rate to MCLR for a Home Loan a nominal amount is charged as fees by the bank for changing the basis of the rate applicable. You should always consider whether it is worth to incur such an expense. The method of calculation of these switch over charges may vary from bank to bank and one customer to another.

  • Few banks have waived off switch charges to benefit their customers.
  • Few charge a fixed amount as conversion fees.
  • Few compute the fees as a fixed percentage ranging from .5% to 2% of the loan sanction amount.
  • Others compute the fees as a fixed percentage ranging from .5% to 2% of the outstanding principal amount.

This would, however, be a small percentage of the principal outstanding. Thus when considering the switch, it should be considered along with the related charges. In the above example, the quantum of saving on account of the switch from base to MCLR regime is so high that the outflow of fees for the switch is completely justified.

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June 2021