Here's how MCLR linked home loan works

Posted by Shreekant Rao on November 15th, 2016

All bank loans, including home loans, taken after April 1, 2016, are now linked to the bank's marginal cost of funds based lending rate (MCLR). Earlier, they were linked to the bank's base rate. So now when you approach a bank for a home loan, make sure you know these four important things about MCLR.

*MCLR rate: Banks publish overnight, one month, three months, six months, one year, two years, three years MCLR rates each month. Home loans are typically linked to 12-month MCLR of banks.

*Mark-up on MCLR: Banks may or may not lend at MCLR. They may ask for a spread.

*Reset loan period: If the loan is linked to the bank's 12-month MCLR, the next change will happen after 12 months.

*Home loan with a fixed vs floating interest rate: In a falling interest rate scenario, it helps to choose the latter, but potential borrowers may benefit out of the former if the rate cycle turns.

MCLR and home loan rate

Currently, the 12-month MCLR for most banks is in the 9.05-9.45 per cent range. After the mark-up (spread), the actual home loan rate on an average is around 9.35 per cent, or could be higher too.

Considering the heavy emphasis the regulatory bank has been laying on liquidity, a rate of 9.35 per cent is still extremely high. Until and unless the MCLR drops down to sub-9 per cent levels, we will not see a large enough movement in terms of loans that will provide the necessary shot in the arm for various sectors, especially real estate which has been facing a considerable liquidity issue."

MCLR mark-ups

The actual home loan interest rate can be equal to the MCLR or have a 'mark-up' or 'spread', but can never be lower than the MCLR.

Reset period makes floating rate fixed for a year

In the base rate era, when the Reserve Bank of India (RBI) reduced the policy rate, the expectation for a home loan rate cut emerged for both existing and new borrowers.


Under MCLR, do not, therefore, expect the EMIs to fall immediately after the RBI cuts repo rate. Instead, have a systematic partial prepayment plan in place to lower interest burden on the home loan. After all, the earlier you finish your home loan, the higher will be your own equity in the house.


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Shreekant Rao

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Shreekant Rao
Joined: November 3rd, 2016
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