One question regarding Home Loan interest rates that have often lingered is about transferring Home Loans, especially when there has been a change in the interest rate of the policy. Recently, some financial institutions have changed their base rates and their Marginal Cost of Fund Based Lending Rates (MCLR). The only condition here is that the base rate will follow the previous benchmark since the MCLR, and the base rate has a gap of 5 years.
Many are considering transferring their Home Loans to avail the MCLR interest rate to enjoy lower Home Loan interest rates. To make the right decision in this situation, you should know what an MCLR rate is and how it differs from the base rate? Let us answer some of these questions below.
What are Base and MCLR Interest Rates?
MCLR
The Marginal Cost of the Fund-Based Lending Rate or the MCLR is the minimum interest rate a financial institution needs to charge for a specific loan. It dictates the lower limit of the interest rate for a loan. This rate limit is set in stone for borrowers unless specified otherwise by the Reserve Bank of India.
Base rate
The base rate was the minimum interest rate for loans enforced by the Reserve Bank of India before the emergence of the MCLR. Functionally they are similar to the MCLR rate, as both function as the lower limit of interest rates that a financial institution can charge the borrower.
The goal of both rates was to have a transparent monetary lending policy that would make the process of setting the limit of interest rates by financial institutions convenient.
Now that we have understood what an MCLR rate is and what a base interest rate is, we can move and compare the two.
What are the differences between an MCLR rate and the base rate?
When it comes to Base Rate vs MCLR, here are some of the points to know. Specifically, there are four critical points of difference you should be aware of. They are:
Base Rate | MCLR |
The basis of this interest rate depends on the average cost of funds. | The basis of the rate depends on the marginal cost of funds. |
The operating expenses and expenses to maintain the cash reserve ratio are vital in determining the base rate. | The deposit rates, repo rates, operating costs and the cost of maintaining the cash reserve ratio determine the MCLR rate. |
The base rate is not dependent on the changes made to the Repo rate. | MCLR is dependent on the changes made to the Repo rate. |
The MCLR varies according to the tenure of the given loan. | Lenders can change the Base rate every quarter. |
Should you change from Base rate to MCLR rate?
The Reserve Bank of India (RBI) has made it clear that banks should allow base rate borrowers to switch to MCLR when there is a change in the policy rate. However, before you decide, you should seek professional guidance. Financial advisors can provide you with updated information and guide you through the process of transfer.
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*Terms and conditions apply. Home Loan at the sole discretion of HDFC Bank limited. Loan disbursal is subject to documentation and verification as per Banks requirement.
