Aug 24, 2023

MCLR and Base Rate in Home Loan: Key Importance

by Godrej Properties Limited



Borrowers often encounter terms like MCLR and Base Rate in home loans. These factors are critical in setting interest rates and total borrowing costs. As a prospective homebuyer, comprehending the importance of MCLR and Base Rate can empower you to make informed decisions. 

What is the Base Rate for Home Loans?

The Base Rate acts as a bank's minimum lending rate, dictating the interest rates for different loan products. The RBI fixes the base rate. Before the advent of MCLR (Marginal Cost of Funds based Lending Rate), it served as the common benchmark. Due to infrequent rate revisions, the Base Rate scheme had some drawbacks that delayed informing borrowers of changes to policy rates.

MCLR - Enhancing Borrower Benefits

With the advent of MCLR, banks became more responsive to policy rate changes by the central bank. MCLR is calculated based on factors such as the marginal cost of funds, operating costs, and tenor premium. It allows banks to pass on the benefits of policy rate cuts to borrowers promptly. This mechanism has made home loans more transparent and efficient.

The Pros of MCLR in Home Loans

  • Flexible Interest Rates: MCLR enables borrowers to experience changes in interest rates with fluctuations in market conditions. This offers more flexibility than the earlier rigid Base Rate system.
  • Faster Transmission: As MCLR considers the current cost of funds, any reduction in the repo rate by the Reserve Bank of India can be swiftly passed on to borrowers through lower MCLR rates.
  • Better Borrowing Experience: MCLR's dynamic nature ensures borrowers can get the best interest rates in a changing economic environment, enhancing the overall borrowing experience.

The Importance of Base Rates in Home Loans

While MCLR offers several advantages, the Base Rate still holds significance for some borrowers:

  • Existing Borrowers: Borrowers who availed of loans before MCLR's implementation continue to operate under the Base Rate system until they switch to the MCLR system.
  • Legacy Loans: Certain older loan products may still follow the Base Rate system, making it essential for borrowers to understand their loan's benchmark.

Conclusion: Cracking the Interest Code

MCLR and Base Rate in the home loan has revolutionised the lending landscape, ensuring borrowers benefit from changes in policy rates. While MCLR is the prevailing benchmark for most loans, the Base Rate system continues to be relevant for certain borrowers. It is important to be aware of technicalities like these to make an informed decision.

Frequently Asked Questions

Q: Can I switch from the Base Rate system to MCLR for my existing home loan?

A: Yes, borrowers have the option to switch from the Base Rate system to MCLR by contacting their respective banks and following the necessary procedures. 

Q: Will my home loan interest rate fluctuate if I choose the MCLR system?

A: Yes, under the MCLR system, your home loan interest rate may fluctuate as it is linked to market conditions and policy rate changes.

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