The Reserve Bank of India unveiled the Marginal Cost of Funds-Based Lending Rate, or MCLR, in 2016 to replace the base rate structure that had been in effect since 2010. The MCLR aims to set a ceiling below which financial institutions cannot provide home loan interest rates. In other words, the financial institution cannot authorize loans or establish interest rates on loans lower than the MCLR benchmark.
Please continue reading to learn more about MCLR and how it affects home loan interest rate changes.
What Is MCLR?
Except under specific circumstances, the MCLR rate is the minimum interest rate below which banking institutions cannot lend. The main objective of introducing the MCLR is:
- To bring clarity to financial institutions when setting their interest rates.
- To promptly pass on the benefits of the RBI’s lending policy rate decision to clients.
- Ensure that funds are available to borrowers at affordable rates
Under MCLR, commercial banks must report their interest rates for various tenures every month. Customers may easily view the rates by visiting the financial institutions’ official websites. However, it is essential that before beginning the home loan process, you should be aware of the following MCLR exemptions:
- Personal loans, car loans, home loans (fixed rates)
- Loans falling under Government schemes such as PMAY
- Loans obtained from NBFCs are exempt from the MCLR system.
What Does MCLR Mean for Housing Loans?
The MCLR lending rate mechanism is only applicable to loans with floating interest rates and not on fixed interest rate loans. Thus, you will not be immediately impacted if you are servicing a fixed-rate home loan. However, consumers who have chosen floating rates may see home loan interest rate changes.
Interestingly, if you pick a yearly MCLR house loan, your EMI will remain constant throughout the term, regardless of changes in repo rates. It will, however, adjust for a year before staying constant for the next year. As a result, if you have a house loan based on yearly MCLR and interest rates rise, you will profit since your EMI will not increase for a year. Similarly, interest rate reductions will benefit the borrower only after a year.
How does a Repo Rate Hike Impacts Home Loans?
If the RBI raises the repo rate, it will cause a rise in the MCLR rates of banks. As a result, lenders will hike the floating home loan interest rate. This directly impacts house loan EMIs, which will jump as a result. As a result, an increase in repo rates has a negative effect on house loan EMIs. However, to mitigate the impact of an increase in interest rates, you can use two strategies to keep your EMIs low:
- Expand the loan term. As the loan term gets longer, this will assist lower EMIs.
- Make a partial loan payment. This will minimize your overall debt burden and, as a result, your EMI.
The MCLR method is closely linked to the RBI’s rate policy decisions. However, the approach is simple and offers borrowers a good sense of the current rates and the difference between fixed and fluctuating rates. This will assist him in making the best selection for his needs and financial position.