With SBI reducing its marginal cost of lending rate by 90 basis point, in the beginning of January’17, which has in turn, reduced the lending rates for new borrowers, queries have started pouring in that does it make sense for the other home loan borrowers from different banks to move their home loans to SBI with lesser rates.
Many of the borrowers who have taken home loan 3-4 years back are at 9.5% – 9.8% kind of Interest rates. Considering the new rates which are around 8.5% definitely sounds attractive.
What is Benchmark Prime lending rate (BPLR), Base rate (BR) and MCLR (Marginal Cost Lending Rate)?
Benchmark Prime Lending Rate
In Simple words, BPLR is the reference rate that each bank decides to fix the Lending rates to each borrower on different loans. This method was prevalent before 2010.
Base Rate
The Base rate is the minimum interest rate below which a bank cannot lend, except in the case of a loan to customers against their own deposits, to bank employees and DRI loans.The Base rate is to be decided by every bank separately.
Marginal Cost of Lending (MCLR)
RBI is the supreme authority which controls the flow of money into the economy through various measures after considering the inflation and economic growth aspects.
The detailed methodology for computing marginal cost of funds is given. I will not be getting into its detail of every constituent…but will explain a bit about them. You may refer RBI circular for details.
The MCLR shall comprise of:
- Marginal cost of funds – cost of borrowing in the form of term deposits, savings account, current account etc.
- Negative carry on account of CRR – CRR or Cash Reserve ratio is the mandatory deposit which banks have to keep with RBI.
- Operating costs – branch expenses, employee expenses etc.
- Tenor premium – Higher the tenor of loan higher would be the risk.
- overnight MCLR,
- one-month MCLR,
- three-month MCLR,
- Six-month MCLR,
- One year MCLR.
Banks have the option to publish MCLR rate for other longer maturities too. Check out SBI Interest rates.
Does this mean that Lending rates will change every month?
Yes and NO. Though the MCLR will get reviewed every month and may get revised every month, but your loan interest rates will be impacted only at the reset dates specifically mentioned in the loan agreement.
What is spread?
MCLR only decides the cost of the funds, but banks have to earn more than the cost to remain profitable. So spread is charged over and above the MCLR.
So your lending rates would be as “MCLR + Spread”, and earlier it was “Base rate + Spread”
It is important to note that your loan will not automatically be shifted from Base to MCLR, it is the decision which you have to take, and once moved, you cannot come back.
This is all about the bank reference rates, and how your lending rates get decided. In the next section, I will explain the considerations you should have while deciding on to switch your home loan to other bank or move from Base rate mechanism to MCLR mechanism. Keep watching this space 🙂
I am also thinking about buying a home…but I am confused are these facilities available for Gram Panchayat area also?
No Idea on This. Kindly consult your bankers
Sir,
Thanks for such an informative narration.
I have an outstanding home loan with IDBI amount of approx 22 lakhs, on EMI with Floating rate based on base rate+spread(9.50% currently). Shall I go for MCLR based Intrest.
Thanks again
Prashant
Prashant, as i wrote in the article itself that it all depends on the balance tenure of your loan and also the difference in the current rate and other (MCLR+Spread) offered. You may ask your bankers to do this calculation for you and you may compare their charges with the benefits, to decide. Keep the essence of this article as base
Sir
Thank you for such an informative narration.
I have a home loan from IDBI bank on floating rate linked to base rate+spread(9.50% currently). Shall I opt for MCLR based intrest .
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Your article very nice and more information Entire different home loans, it is necessary find to check some true facts from different home loan. The major important points of different when it comes to home loans are as kind
of principal ( Interest rates ) ( Processing fee ) ( Loan to value Ratio ) However, you need to choose the loan in the entire package and not just focus on single elements. If a loan has a very low interest rate.