Ever since the introduction of MCLR, there have been many people switching from base rate to it. However once the switch is done, it can’t be reversed. This is a major decision and has to be well thought over before completing the switch.
Here are things you should keep in mind before making this switch
What is Base Rate and MCLR?
Base Rate: The base rate for a loan is the minimum interest rate offered by a bank for the loan it offers its consumers. The base rate is for a loan depends on several factors like deposit rate, profit, the cost of banks etc. Banks are in control of the base rate and it can change every quarter. The base interest rate is also independent of repo rate of Reserve Bank of India.
MCLR: The base interest calculation is different for various banks and with RBI reducing the repo rate constantly, it looks the consumers aren’t gaining any benefits. The RBI thus introduced MCLR to guide banks to calculate marginal cost of lending rate. MCLR will induce transparency in the banking system as it will be different according to the tenure of the loan. The lending rate will be different from bank to bank and depends on 4 major factors i.e.
- Marginal cost of funds: This is the marginal cost of borrowing and return on net worth of banks.
- Operating Costs: Operating costs is the cost incurred by the bank to perform day to day operations
- Tenure of premium: An additional slab of interest over the base rate, based on the loan tenure.
- Negative carry on account CRR (Cash Reserve Ration):
Should I switch if to MCLR have an existing loan?
Now before switching your loan to MCLR, contact your bank, calculate the benefits of reduced EMI or tenure with respect to conversion fee and do your cost-benefit analysis and take decision accordingly. Here you can think of balance transfer your home loan to SBI, ICICI bank. In this case, you have to remember the processing or application fee of the new loan in SBI or ICICI bank. The foreclosure charges of the existing loan are also to be checked with the home loan provider.
For existing home loan borrowers, it might be a difficult decision to either stick with the base rate or switch to MCLR and if you switch to MCLR, one can’t switch back. Many experts believe that it’s important and makes sense to switch to MCLR as the interest rates are on the downward slope. The switch also comes with a conversion fee which might be anywhere between 0.5% to 1% of the loan amount but considering the amount of benefits it will provide down the road, it seems like a good decision. If you have taken an home loan after April 1st, 2016 and it’s already on the MCLR, then there is no conversion free to transfer to the new MCLR.
Apart from paying the conversion fee, MCLR can be extremely beneficial and can help save a lot of money on loan repayments.