BackOne-minute guide: Interest rate on home loans
MCLR is the new benchmark lending rate for floating rate loans and is the minimum interest rate at which commercial banks can lend
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On Wednesday, Axis Bank Ltd reduced its base rate by 10 basis points (bps) to 9.35% per annum. One basis point is one-hundredth of a percentage point. The impact of this rate change will be only on those borrowers who have taken a loan on base rate. At this point, floating rate home loan borrowers could be on benchmark prime lending rate (BPLR), base rate or marginal cost of funds-based lending rate (MCLR). Also, do remember that these rates and changes are applicable on loans given by banks, and not by other lenders such as housing finance companies.
MCLR
MCLR is the new benchmark lending rate for floating rate loans. This is the minimum interest rate at which commercial banks can lend. All banks moved to MCLR in April this year. This rate is based on four components—marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium. Hence, MCLR is closely linked to the actual deposit rates. The central bank has asked banks to publish at least five MCLR rates—overnight, one-month, three-month, six-month and one-year. Banks are also free to set rates for longer durations such as two and three years. In case of MCLR-linked home loans, you will have a reset clause of either 6 months or 1 year. The bank will decide which frequency it prefers.
All MCLR-linked loans come with a spread, which is the margin you have to pay over the rate.
BASE RATE
Till 31 March this year banks used to lend on base rate, which was the minimum interest rate at which commercial banks could lend to customers. Base rate mainly includes three things: cost of fund, unallocated cost of resources and return on net worth. The ratio of these three elements differed across lenders. Banks changed the base rate whenever their cost of funds and other parameters changed. If your loan is on such a rate, your equated monthly instalment (EMI) will change whenever the base rate changes. Base rate-linked loans also come with a spread.
BPLR
Till June 2010, BPLR was used as the benchmark rate by banks for lending. Banks would keep BPLR at an artificially high level and charge most of their borrowers a rate much below this. The central bank felt that banks were misusing it by lending money at rates lower than BPLR to privileged customers, while passing on the cost to retail borrowers who lacked the power to negotiate.
WHAT SHOULD YOU DO?
At this point, if you are taking a floating rate loan it will be based on MCLR. New loans are no longer available on base rate and BPLR. If you already have a loan that is pegged to BPLR or base rate, you have the option to shift to MCLR. But before doing this, do check the interest rate, the cost of switching and other administrative charges attached to a home loan. Banks’ websites or online loan portals will have this information.
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