What is MCLR rate? What does it mean for my home loan?

Marginal Cost of Funds based Lending Rates, or MCLR, is the lowest interest rate that a bank or lender can offer to borrowers. This means lenders CANNOT offer home loan interest rates lower than the MCLR.

The central bank, Reserve Bank of India (RBI) had introduced the concept of MCLR with effect from April 1, 2016, due to limitations in the base rate regime. MCLR was introduced so that the end borrowers could enjoy the benefits associated with repo rate cuts by the RBI.

The RBI asked banks to link the base rate with MCLR for old home loans. Home loans that were taken before April 1, 2016, were based on base rate, which was arbitrarily decided by banks.

"Since MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the base rate to the MCLR with effect from April 1, 2018," the RBI said.

What it means for you

MCLR is closely linked with the repo rate and fund costs of the banks. If there is a change in the repo rate, then ideally, it should have an impact on your home loan’s floating rate of interest. If a bank transmits the rate cut to its customers, it will bring down the MCLR and hence, the floating rate of interest associated with your home loan will also come down.

It should be noted that lower MCLR will not affect your equated monthly instalments (EMIs), but the tenure of the loan will get impacted.

As MCLR is associated with floating rate home loans only, if you opt for a fixed-rate home loan, any change in the MCLR will not affect the home loan. Home loan interest rate is following a downward trend currently. So, you can benefit from switching to MCLR if you are planning to purchase a house.

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