The Reserve Bank of India, in their recent monetary meet on October 2020, announced that the repo rate would remain unchanged at 4%. Now, this statement can be interpreted in multiple ways. However, primarily it implies that the home loan borrowers, whose loans are linked with MCLR rate, need to continue paying an unchanged EMI. 

While MCLR rate directly influences the monthly instalments of a home loan, a large number of individuals are still not aware of this mechanism of how MCLR works. Thereby, it becomes necessary for both existing and new borrowers to learn about this factor, which determines the affordability of their borrowed sum. 

How home loan EMI is related to MCLR?

Since 2016, MCLR rate came into effect replacing the old base rate for home loans. RBI has made it mandatory for all financial institutions to link their lending rate with an external benchmarking system, which refers to the repo rate of RBI. 

Such a drastic reform in the lending sector has brought long-due transparency that benefitted both the customers and lenders. Moreover, individuals who are servicing a home loan at base rate can also transfer their loan to MCLR home loan. 

However, before that, they need to know how it works in terms of EMI.  

  • MCLR rateapplies only to the floating interest rate. Thereby, borrowers with fixed home loan interest rate will not be affected by MCLR. Moreover, even the slightest change in the repo rate will affect MCLR. 
  • Since the real estate market is witnessing a downward trend at present, borrowers may find it more beneficial to switch to MCLR home loans. 
  • Even under MCLR, you cannot see the instant fall in EMI immediately after rate cuts. Therefore, you need to keep aside sufficient funds to initiate a pre-payment to reduce the burden of EMIs. 
  • For existing borrowers, the home loan will reset only after the MCLR reset period of 6 months or one year. However, the new borrowers will be benefitted immediately after repo rate falls by availinga home loan related to MCLR. 

Alternatively, if your primary aim is to make your home loan more affordable, you should find out the best possible ways to reduce home loan tenure and EMI. However, both existing and new borrowers can consider a few factors until another rate cut takes place. 

Things to consider for MCLR home loans 

  1. For existing borrowers 

Primarily, the MCLR rate involves both a lending institution’s internal factors and an external benchmark like the repo rate. Though borrowers have the option to transfer their loan to an external benchmark related loan, they need to keep certain things in mind. For instance, to make such a transfer, borrowers need to pay substantial administrative fees. Therefore, most financial advisors suggest this option only if the difference between the two different interest rates is more than 0.5%. 

Moreover, the MCLR regime may have limited value, based on when a borrower is transferring the existing loan to an external benchmark regime. For instance, if you are just 3 years away from closing your home loan, a transfer may not be a good idea. 

However, selected financial institutions offer home loans with competitive interest rates and other feasible terms. 

They also provide pre-approved loan offers that hasten the loan application process. These offers are available for a range of financial products like loan against property, home loan and others. All you have to do is enter your name and contact number to check your pre-approved loan offer. 

  1. For new borrowers 

Before availing a loan, new borrowers need to consider the risk premium and the margin beside the interest rate. They further need to keep in mind that other external benchmark linked interest rates are more unstable than that of MCLR rate.

Alternatively, eligible borrowers can also opt for different government-backed credit-linked subsidy schemes to reduce the home loan interest rates and the EMI at large. 

Hence, with first-hand knowledge of MCLR and its effects on loan, you can gauge the affordability of your EMIs and also restructure the financial plan accordingly. Nevertheless, MCLR being an internal benchmark, you need to stay updated about the recent MCLR rate to negotiate the loan terms with a lender.

One thing to remember here is that lenders will also consider an applicant’s eligibility factors when extending loans at certain rates. The amount of spread applicable to the MCLR for an individual relies greatly on his/her credit history, repayment capacity and more.