At the beginning of the FY 2016, the Reserve Bank of India introduced a new methodology to determine the benchmark lending rate or the base interest rates on loans – the Marginal Cost of funds-based Lending Rate (MCLR). After the MCLR came into effect, it invoked a faster response to policy rate revisions from financial institutions. Now, MCLR will automatically apply to all credit forms including a housing loan. Existing borrowers can choose to switch over to MCLR rate in home loan against a fee levied by their lenders. In the present scenario, both financial institutions and NBFCs offer loans to prospective borrowers based on the MCLR.
Should You Switch?
Financial experts advise that it’s a wise move to shift to MCLR as the rate of interest is on a downward slope. Even if it requires meeting some additional charges upfront, it’s worth the switch. One might need to pay a conversion fee of up to 0.5%-1% of the loan amount if one decides to move towards the new regime. Hence, conduct a cost-benefit analysis, like you when evaluating loan refinance options such as housing loan balance transfer.
Plus, MCLR brought in transparency to determination of interest rates and eliminated the amount of time required to meet the repo rate-linked era. This new system is more dynamic and efficiently regulated with an end objective of transmitting the monetary policy without any manipulation and ensuring compliance with financial institutions and NBFCs.
MCLR for Prospective Borrowers
Prospective borrowers will now avail loans MCLR-linked loans. However, if you’re applying for credit – read the terms and conditions of the contract carefully. Under this new regime, banks will practice their discretion in deciding the reset period – applicable to all mortgage loans including home loans. So, the housing loan interest rate now gets pegged onto the MCLR mark along with a margin set by the lender over it, which is known as the spread. You should for lenders who offer loans against the lowest spreads on the loan.
What Is the Flipside?
Although meant to boost the industrial and service sectors, this MCLR regime is not without its share of complexities. In fact, the flexibility which the lenders enjoy within this MCLR system could build a platform for variable pricing. Lenders still have the option to fix margins between MCLR and lending rates – depending on the various internal-lending criteria and product construct. However, competition negates the probability of improbably high-interest rates.
Considering you opt for a Home Loan or a loan for land purchase from a reputed NBFC – you’ll be guaranteed a competitive interest rate and benefit from a host of innovative features.
For instance, you can lower your home loan EMIs by opting for a balance transfer at the lowest possible rates in India. Plus, you can draw benefits from a high-value top-up loan of up to 50% of the sanctioned loan amount. However, you must always check the eligibility criteria of your lender using an eligibility calculator.It is also recommended to use a loan EMI calculator to help you determine the amount of EMIs and fix your budget accordingly.
This is all that you need to know what is MCLR, about MCLR-based home loans etc. Now, the decision is up to the borrowers, to pick an option in the declining interest rate scenario – depending on their cash flow and risk appetite.