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Home Loan Starting 6.65%*

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About MCLR - Marginal Cost of Funds Based Lending Rate

Often commercial financial institutions are reluctant to alter their lending and deposit rates, followed by a change in repo rate. In fact, the transmission of the benefits of repo cuts was often delayed. As a means to overcome such shortcomings, the Reserve Bank of India launched the MCLR rate.

MCLR Rate Meaning

Marginal Cost of Funds Based Lending Rate or MCLR is the lowest possible interest rate at which financial institutions can offer loans. It is an internal benchmark that was introduced in April 2016.

The Reserve Bank of India introduced this benchmark to pass down the benefits of repo cuts to borrowers. The introduction of MCLR rates is an effective means to ensure that lenders do not charge an interest rate beyond RBI's prescribed margin.

What is MCLR Rate in Home Loan?

Generally, loans offering floating interest like housing loans and loans against property are linked to MCLR's current rate. However, some financial institutions may offer fixed-rate housing loans under certain schemes.

The MCLR rates (w.e.f 1st August 2020) in Home loan are given in a tabular format below -

Tenor Based MCLR Home loan MCLR rate (%)
3 Year MCLR 7.85
1 Year MCLR 7.45
6 Month MCLR 7.35
3 Month MCLR 7.30
1 Month MCLR 7.25
Overnight MCLR 6.80

 

Calculation of MCLR Rate for Home Loan

Being an internal benchmark, the MCLR rate is determined by individual financial institutions based on the loan repayment tenor.

Note that the calculation of MCLR for Home Loan is based on multiple variables. The major factors are discussed below –

  • Operating Cost: It includes operating costs borne by a financial institution while offering loans. However, it excludes the levied service charges.
  • Tenor Premium: Lending institutions levy this premium to cushion the lending risks associated with a longer tenor. Usually, a longer tenor indicates a higher risk for the lender.
  • Marginal Cost of Funds: It factors all borrowings of a financial institution, including current accounts, savings accounts, fixed deposits, equity, etc. The interest charged on such borrowings is taken into consideration for computing the marginal cost of funds.
  • Negative Premium on CRR Account: CRR is the minimum cash reserve that financial institutions must maintain all the time. It serves as a safety blanket and token of liquidity. Every time a financial institution lends money to a borrower, it impacts the CRR negatively and could indicate a nil return on the reserve leading to a negative carry.

The formula prescribed by the Reserve Bank of India for calculation of MCLR is given below:

Marginal cost of funds = Marginal borrowing cost x 92% + return on the net worth x 8%

Difference between MCLR Rate & Base Rate

Since MCLR rate for home loan is quite similar to base rate in terms of purpose, individuals often confuse the two benchmarks.

MCLR Rate Base rate
Financial institutions set the current MCLR rate. The base rate is fixed by RBI.
The interest rate of MCLR-linked loans is published monthly. The interest rate of base rate linked loans are updated quarterly.
Loan tenor is an important factor. Loan tenor is an important factor. Loan tenor is not an important determining factor.
MCLR rates depend on changes in repo rate. Base rates do not depend on the change in repo rate.
It is more transparent than the base rate when it comes to setting interest rates. It is not as transparent as MCLR while setting loan rates.

 

Having an insight into the underlying differences can help in making an informed borrowing decision.