InvestorQ : Should I convert my home loan from base rate to MCLR rate?
Pratik vyas made post

Should I convert my home loan from base rate to MCLR rate?

Answer
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Swapnil Sarang answered.
2 years ago


Yes, it is advisable to convert your home loan from base rate to MCLR rate as it is more in line with the interest rates prevalent in the market.

But for those who don’t know whether their home loan is based on base rate or MCLR, the easiest way to decipher that is if your home loan was taken before April 1, 2016. If yes, then your home loan is linked to the base rate, if not, your home loan is linked to the MCLR rate.

The MCLR came in to effect from April 1, 2016, as it found various limitations in the base rate regime. As a result, most borrowers shifted their loans from the base rate to the MCLR. One of the most pertinent reason for the switch was the sluggishness observed in banks' passing on the benefits of RBI rate cuts, or repo rate cuts, to borrowers. In contrast, as the MCLR takes in to account the marginal cost of funds, including the rate at which the bank raises deposits and other cost of borrowings, it has helped banks in passing on the benefits to the customers unlike in the base rate era.

The RBI also made it clear that banks should allow base rate borrowers to switch to MCLR, if they so wish. For the same, the base rate borrowers have two options:

1. Switch to MCLR-based lending either with the same bank or get the loan transferred i.e. getting it refinanced from another bank on MCLR mode

2. Continue the loan on base rate, especially if the loan’s tenure is nearing the end

Let’s say you have a home loan of Rs. 25 lakh, with less than 18 years tenure and you are paying interest at 9.30%, then moving to the MCLR system (at 8.30%) could help you save Rs. 6.98 lakh. There is a cost of switching (0.58% of total outstanding) involved, but it is less than Rs. 15,000 in this case, so it is definitely an expense worth making.

The table below is only for illustration purpose and will help explain how much you can save by switching to the MCLR. The assumption is that your home loan interest rate is 9.30% and you have 18 years of tenure left.

Loan amount

Savings

20 lakh

5.55 lakh

30 lakh

8.40 lakh

40 lakh

11.25 lakh

50 lakh

14.09 lakh