Should you switch your home loan from base rate to MCLR?

Rishi Mehra

Over the last year or so, it’s the home loan that has grabbed the nation’s attention from the introduction of new interest rate mechanism, Marginal Cost of Lending Rate (MCLR), to the constant fall in the lending rates induced greatly by the demonetization drive.

Leading the show is State Bank of India (SBI) which had slashed its 1-year MCLR by a steep 90 basis points (bps) to 8% at the start of 2017. The effective lending rate charged by the state-owned bank was 8.50%-8.95% per annum in January this year. But now, the effective rate is down to 8.35%-8.80%.

Another public lender that has hogged the limelight in the ongoing rate cut saga is Bank of Baroda (BoB), which took everyone by surprise at the start of the year by offering home loan at 1-year MCLR of 8.35% for borrowers with a CIBIL score of 760 points and above. While the overall rate charged by BoB ranges from 8.35%-9.35% p.a.

Private lenders are also not left behind with ICICI Bank lowering the 1-year MCLR to 8.20%, bringing down the effective rate to 8.35%-8.85%. HDFC Limited, on the other hand, offers a home loan at 8.35%-9.05%. The MCLR mechanism applies to the borrowers availing a home loan on or after April 1, 2016. So, these are the borrowers reaping the benefits of constantly reducing rates.

But what about those who are serving the home loan before April 2016? They are still under the base rate regime, where the rate charged is much higher compared to MCLR. The overall interest rate on a home loan under base rate can be around 9.50%-10% across banks in India. The pace of base rate cut, as one would have to say, is very slow in response to the RBI’s accommodative stance in most parts of the easing monetary policy that began in Jan, 2015. For instance-SBI’s base rate a year and a half back was 9.30% and now 9.10%, down by a mere 20 bps.

So, the question everyone’s asking, is it worthwhile switching from base rate to MCLR? So, let’s stay glued to the information…

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