Loans
One question regarding Home Loan interest rates that has often lingered is about transferring Home Loans, especially when there has been a change in the interest rate under the lending policy. Some financial institutions have recently 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 have 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, you should know what an MCLR rate is and how it differs from the base rate. Let us answer some of these questions below.
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.
The base rate was the minimum interest rate for loans enforced by the Reserve Bank of India before the MCLR emerged. 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.
Both rates aimed to have a transparent monetary lending policy that would make 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.
When it comes to Base Rate vs MCLR, here are some of the points to know. Specifically, you should be aware of four critical points of difference. They are:
The Reserve Bank of India (RBI) has clarified 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 updated information and guide you through the transfer process.
Choosing between the Base Rate and MCLR can significantly impact your Home Loan interest outgo. Since MCLR is more responsive to repo rate changes, it often results in lower interest rates over time. Before switching, evaluate the cost-benefit carefully and seek expert advice to decide what works best for your loan with HDFC Bank.
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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 Bank’s requirement.