Understanding How The Home Loan MCLR Works

People looking to apply for home loans are always searching for options that are more beneficial to them. A couple of years ago, a new benchmark called MCLR, which stands for Marginal Cost-based Lending Rate, was introduced. This rate is even lower than the base rate fixed by the RBI. However, only current borrowers with floating home loan rate interest can switch to MCLR. It was introduced to make loans that have a fair interest rate for both lenders and borrowers. MCLR also helps in making the lending process more transparent.

The Reserve Bank of India (RBI) has made it mandatory for banks to fix a minimum of 5 MCLR rates. The five rates are for – a year, half a year, three months, a month, and overnight. NBFCs and independent banks have the freedom to fix as many MCLR rates as they desire. Since banks cannot afford to perform a monthly analysis, analysis of MCLR rates is done on a quarterly basis.

MCLR differs from the base rate in the sense that it does not depend on repo rates fixed by the RBI. MCLR has a different set of factors it depends upon - Cash Reserve Ratio, tenor premium, operating costs, and the marginal cost of funds.

RBI has a specified formula to calculate MCLR. The interest rate on all the borrowing sources of the bank is considered to calculate the marginal borrowing cost.

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