Decoding the 3 interest rates that impact your home loan

The rate-setting method on home loans has evolved over the years. Here is what are the differences between them.

MCLR

If you are planning to take a loan from a bank on floating rate to buy a house or a car, it will be linked to marginal cost of funds based lending rate (MCLR). MCLR came into effect in April 2016. It is a benchmark lending rate for floating rate loans. This is the minimum interest rate at which commercial banks can lend. This rate is based on four components—marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium. MCLR is linked to the actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike MCLR and lending rates are set to go up.

Base rate

Banks stopped lending on base rate from April 2016. But, loans taken between June 2010 and April 2016 from banks were on base rate. During the period, base rate was the minimum interest rate at which commercial banks could lend to customers. Base rate is calculated on three parameters — cost of fund, unallocated cost of resources and return on net worth. Hence, the rate depended on individual banks and they changed it whenever their cost of funds and other parameters changed. You have the option to convert your loans from base rate to MCLR. Currently, base rate is around 50-100 basis points higher than MCLR.

BPLR

Benchmark prime lending rate (BPLR) was used as benchmark rate by banks for lending till June 2010. The RBI noticed that banks were keeping BPLR at an artificially high level. The bank was then lending to consumers below BPLR. There was no rule that banks were supposed to lend only at the BPLR mentioned. The central bank felt that banks were misusing it by lending money at rates lower than BPLR to privileged customers. Meanwhile, other retail customers continued to get loans at a higher rate. Currently, the housing finance companies lend at retail prime lending rate, which is similar to BPLR.