Home loan interest rates may vary depending on several parameters. Of these, benchmarks such as base rate and MCLR are particularly important. Taking note of what these benchmarks entail offer individuals an insight into their repayment liabilities against a Home Loan. Further, understanding the difference between MCLR and base rate helps in choosing a housing loan scheme that suits one’s financial health.
What is Base Rate?
Base rate refers to the lowest interest rate that the Reserve Bank of India sets for all financial institutions. No lender can offer credit at rates lower than this base rate. This particular system was introduced in 2010 to improve transparency.
The RBI calculates this base rate using several parameters, some of which are:
- Unallocated overhead expenses
- Administrative expenses
- Deposit expenses
- The revenue earned by a specific financial institution in the previous fiscal
What is MCLR?
Before borrowers can tell the difference between the base rate and MCLR, they should know what MCLR signifies. The Marginal Cost of Funds based Lending Rate is a newer form of regulating the lowest interest rates on offer from all Indian financial institutions. It replaced the base rate system in 2016.
Key Differences Between Base Rate Vs MCLR
Here are some of the key differences between the base rate and MCLR.
| Base Rate | MCLR |
|---|---|
| The base rate is the minimum rate of interest set by RBI, no financial institutions can lend at an interest rate below the base rate. | MCLR is an internal benchmarking system applied by a financial institution, under which they can set their own lending rates considering a spread factor. |
| The base rate does not get impacted with revision of RBI’s repo rate. | MCLR gets impacted as and when RBI revises the repo rate. |
| Usually, the minimum rate of return or profit margin is taken into consideration while deriving the base rate. | While determining the MCLR, the tenor premium is taken into consideration. |
| Usually, it is the average cost of funds which determines the base rate. | Typically, MCLR is based on the marginal cost of funds. |
Also Read: All About MCLR rate
How to Shift Base Rate to MCLR?
After considering MCLR vs base rate, borrowers can decide to shift their outstanding principal amount to the MCLR system. A home loan balance transfer is a simple and convenient process. However, one must calculate the various costs involved with this process to assess his/her actual savings.
Shifting the balance to Bajaj Housing Finance also involves other benefits, such as access to a substantial amount of additional credit in the form of a top-up loan. This credit is available over one’s existing housing loan and comes with no end-use restriction.
