Getting a housing loan and paying the monthly EMIs regularly is a huge financial burden for most of the families in India today. RBI last year came up with a new structure which will determine the interest rate for housing loans and some other loans like personal loans. This is called as MCLR, we will be discussing in detail about it and its benefits.
Also Read: 8 Reasons why your Home Loan Got Rejected
1. What is MCLR?
MCLR stands for Marginal Cost of Funds based Lending Rate. This will be followed by banks and financial institutions in India starting April 1st, 2016. This has replaced the previously followed base rate. MCLR is considered more efficient and cost effective both for lenders and loan takers.
2. Why MCLR
Previously banks followed the base rate of interest to determine the loan interest rates. Whenever RBI revised the Repo rate the banks will change the interest rate but it took a long time to change. This affected the borrowers. Even after many warnings from RBI banks did not pass on the interest rate benefit instantly to customers. This forced the RBI to come up with MCLR which will ensure the rate of interest changes as soon as RBI changes the Repo rate. This will ensure cheaper loans and interest rates for customers.
3. Type of Loans for MCLR
Before going there, let us understand the two types of loans.
- Fixed rate Loan: The rate of interest is fixed at first and will remain the same throughout the loan tenure irrespective of the repo rate change by RBI.
- Floating rate Loan: The rate of interest on the loan will change whenever RBI changes the Repo rate. Based on the RBI changes, you might have to pay either higher or lower interest rate and it will keep changing throughout your loan period.
MCLR is applicable only for floating rate loans. This applies for both personal loan and housing loan. Vehicles loans are mostly fixed rate of interest and won’t be affected by MCLR.
4. Reset Clause.
RBI has advised banks to provide 5 different duration for resetting the interest of floating loans namely
- One Month
- Three Months
- Six Months
- One year
Banks can follow any one of the above-listed reset clauses for your loan based on the loan tenure and also various other factors.
5. Impact on EMI
When the MCLR is changed and your floating rate is also changed by the bank, it will not affect your monthly EMIs. The amount you pay per month will remain the same throughout and only the number of EMIs will be changed. If the rate goes up the number of EMIs will be increased and vice-versa. If you prefer you can approach your lending bank ask them to change the EMI amount and keep the number of EMIs unchanged.
6. Impact on Existing Borrowers
MCLR is applicable only for loans taken after April 1st, 2016 and will not affect loans disbursed before. MCLR rate is beneficial for the customers and is better than the base rate which was followed earlier. So you can approach the bank and request them to convert your loan into an MCLR based loan. Banks will be happy to do at a charge. You need to pay a fee to compensate the loss for the bank. Even if you pay a lump sum one-time fee, you will still end up beneficial in the long term. So ask for an estimate for the loan in MCLR format and do a comparative study before upgrading to MCLR.
Approach your lender and check the benefit of moving to MCLR and take a wise decision. This is clearly a step in the right direction for home buyers and also for our economy.