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Difference Between MCLR and Base Rate

Base Rate vs MCLR

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.

MCLR is an internal benchmarking system, using which as a reference point, a financial institution can devise its own rates. Usually, a spread factor is applied to MCLR before arriving at the rates offered to customers.

The primary difference when considering base rate vs MCLR is that the latter ensures increased transparency. Financial institutions following the MCLR system must adjust their interest rates as soon as the Reserve Bank of India declares a change in its repo rate.

Under the base rate system, lenders did not have this compulsion to adjust interest rates immediately.

After understanding both these regimes, individuals can appreciate the benefits of the MCLR system. Existing borrowers under the base rate system can opt for refinancing and shift their existing loans to the MCLR system.

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.