Most customers would feel more at ease knowing they can take advantage of minimum home loan interest rates the moment they happen.
For example, if you have a fixed-interest mortgage and your lender announced their intention to lower the interest rate on Jan 28th, it would take approximately two months for them to apply the change. But with variable-interest mortgages such as MCLRs, reductions in borrower rates occur directly without a lag in time. Look out for this kind of information about your home loans!
Know About the Interest System
MCLR is the marginal cost of a funds-based lending rate. It is the minimum interest rate that a bank can charge for a loan. MCLR is usually higher than the base rate. The base rate is the minimum interest rate set by the Reserve Bank of India (RBI). The RBI reviews the base rate from time to time. Banks are required to set their MCLR based on the RBI’s base rate.
MCLR was introduced in April 2016. It replaced the base rate system. Before that, banks used the prime lending rate (PLR) to price loans. MCLR is a more transparent system. It is based on the marginal cost of funds. The marginal cost is the cost of borrowing funds from the RBI. It includes the interest rate on deposits, operating expenses, and other factors.
MCLR is a more efficient system. It ensures that banks pass on the benefit of lower RBI rates to their customers. MCLR is reviewed monthly. It can be revised daily if the RBI changes the base rate. MCLR can be revised downward if the RBI reduces the base rate. However, it can only be revised upward if there is a change in the marginal cost of funds. Try home loan apply online with Kotak Bank to get loans at a minimum interest rate based on RBI.
MCLR is a good system for borrowers. It ensures that they get the benefit of lower RBI rates. MCLR is also good for banks. It helps them to price their loans efficiently.
What Is MCLR Used For?
MCLR is a rate of interest on which banks base their lending interest rates, which the RBI decides. MCLR is an attempt by RBI to eliminate mediators’ roles and bring down lending rates for the borrowers.
The RBI regulates interest rates and is decided on a weighted average of MCLR, banks’ loans to the market. MCLR helps banks reduce their borrowing costs; therefore, they pass on this benefit to the customers through lower interest rates on loans.
What Was Wrong With the Previous Base Rate System?
This brings greater transparency to the process and makes it more market-oriented. In simple terms, MCLR is a simple, market-based, and real interest rate based on banks’ current cost of funds. In addition, it has two other advantages:
- Banks will not be able to charge an interest rate above the MCLR, so customers are protected from overcharging.
- Since it is a floating rate, the interest on loans will change whenever the interest rate in the market changes.
While the base rate system was flat, which didn’t consider the current market scenario of interest rates, it was getting outdated with time.
How Is the Rate Calculated?
The MCLR is calculated based on the cost of funds to the bank. The cost of funds includes the cost of deposits, borrowing from other banks, and other sources of funds.
The interest rate on loans based on MCLR is calculated by adding a spread to the MCLR. The spread is the margin that the bank charges over and above the MCLR. The interest rate on loans can vary based on the type of loan, the borrower’s creditworthiness, the loan’s tenure, and other factors.
The Current home loan interest rates have been at the lowest in the last few years. This is due to many reasons like the Reserve Bank of India (RBI) cut on repo rate, the introduction of Marginal Cost Lending Rate (MCLR), and the slow down of the United States (US) Federal Reserve.
There are various types of home loans available in the market which are dependent on the interest rates. The interest rates have decreased from 11% and are now at 8.35% for women’s home loans.