MCLR in Home Loans: A Comprehensive Guide
Marginal Cost of Fund Based Lending Rate
As a home loan borrower, you may wish to get the lowest possible loan interest rates. Paying a high-value home loan is often heavy on the pocket, that too for a long time. Fortunately, a few years back in April 2016, the Reserve Bank of India brought forward certain guidelines under which the housing loan borrowers could benefit from cuts in the interest rates. These guidelines are called MCLR, Marginal Cost of Fund Based Lending Rate.
Understanding MCLR
In simple words, Marginal Cost of Fund Based Lending Rate, is a home loan offered by banks, lenders, finance companies, but at lowest interest rates. The main aim of this scheme is to ensure that banks can pass on the benefits of cutting the loan rates.
It was in 2010, that the base rate system was introduced by the RBI in the year 2010 as a replacement for the Prime Lending rate system. The base rate was the minimum interest rate that was fixed by banks. Below the set benchmark money could not be lent. However, RBI felt that the transmission of interest rates in this system was not very operative and the benefits did not reach the customer. Hence, to bring some positive transformation in the process, in April 2016 the MCLR system was brought about.
MCLR in Home Loans
MCLR is connected to the repo rate as well as the lender’s fund cost. And whenever there is a change in the repo rate, it would directly affect the floating interest rate on the home loans in India. Therefore, when the lender cuts down the MCLR, there would be a decrease in the floating rate of interest on the home loan. What should be kept in mind is that the decreased rate and MCLR would not affect the EMI that you are to pay, but it would surely have an effect on the tenure of the loan.
Calculating MCLR
For calculating MCLR the following components are to be kept in mind:
- Marginal cost of fund
- Operating expenses
- Tenure premium
- Cost of maintaining CRR, Cash Reserve Ratio
It is also vital to consider the sources that lend funds to the banks. Most banks generally borrow from savings accounts, current accounts, recurring and fixed deposits etc. to calculate the marginal cost of borrowing, the borrower may refer to the interest rate of the corresponding sources.
As per RBI, the following formula can be used to calculate MCLR,
MCLR = Marginal borrowing cost x 92% + return on the net worth x 8%
Keeping the following points in mind will help in comprehending the different aspects of Marginal Cost of Fund Based Lending Rate, MCLR:
- Under the guidelines of the RBI, banks must maintain a minimum CRR, cash reserve ratio, of 4%. These deposits do not fetch any interest to the banks
- Banks can also obtain a certain allowance called Negative Carry on the CRR
- Banks need to manage the operating costs
- The own-expenses of the banks such as employees’ salary, cost of raising funds, cost of running the branch office, opening a new branch etc. cannot be billed to the bank customer
- MCLR housing loans depend on:
- Tenor premium
- Marginal costs of funds
- Bank operating costs
- Negative carry on CRR
Summing Up
As per financial experts, Marginal Cost of Fund Based Lending Rate, MCLR is a much better option when it comes to interest rate calculations. Every time there is a change in the REPO rate, the consumer can expect a benefit. Thus, giving the home loan borrower a respite in the form of reduced interest rates. However, it should be kept in mind that only the borrowers who have a housing loan on floating rates would be able to avail of this benefit. The fixed rates on home loans in India are not affected by MCLR.