MCLR: A Beginner's Guide to Home Loan Interest Rates in India

Author : Sumit verma | Published On : 08 Jun 2021


Interest is one of the most important parts of any loan, especially quality loans with a tenure of 20 years or more. Yes, home loans. No borrower wants to benefit from low-interest rates. In April 2016, the Reserve Bank of India introduced a new policy called MCLR that allows borrowers to take advantage of real-time credit deductions. Let’s learn all about what is MCLR in a home loan.


What is MCLR?


The Marginal Cost of Funds Based Lending Rate (MCLR) is the minimum interest rate that banks, real estate companies, and other lenders offer when taking out loans from borrowers. In general, lenders cannot offer mortgage rates lower than the MCLR. However, the MCLR is basically the internal standard or benchmark rate of all financial institutions. Lenders may make exceptions if approved by the Reserve Bank of India. It determines the process for determining the minimum mortgage interest rate. The MCLR system was introduced in 2016 that would replace the current basic rate system of 2010. Since the introduction of the MCLR, credit limit renewals and sanctioning of home loans are based on the norms of MCLR.


What is the MCLR rate in a Home loan?


MCLR is linked to the repo rate and lenders’ fund costs. within the case of the repo rate changes, it impacts the floating rate of interest on home loans. So, if the lender reduces the MCLR, the floating rate of interest on the house loan also will reduce. While the reduced rate and MCLR won't affect the equated monthly installment or EMI that you simply are paying, the loan tenure is certainly affected.


How is MCLR calculated?


When calculating the MCLR, the most important thing is to consider all the sources the bank borrows from. Banks typically borrow from a variety of sources, including savings accounts, checking accounts, and term deposits. Borrowers can look up interest rates from these loan sources and calculate the additional cost of the loan. Keep in mind that loans are not the only source of bank funds. It’s also a matter of equity.


As per the formula defined by the RBI, MCLR home loan is calculated as under:


MCLR = Marginal borrowing cost x 92% + return on the net worth x 8%


According to RBI guidelines, banks also are mandated to take care of a minimum cash reserve ratio or CRR of no but 4%. The bank doesn't earn any interest on this sediment. Under MCLR, it's possible for banks to get a particular amount of allowance called Negative to keep up CRR. Banks must also consider and look out for the operating costs. Remember that the bank has its own expenses which include the value of raising funds, paying salaries to employees, opening multiple branches of the bank for customer convenience, and so on. These charges can't be billed to the customer. there's also a reduction or tenor premium. The tenor is just explained because the reset period for interest rates and is directly proportional to the reset period. As such, if the tenor is high, so is that the reset period.


Therefore, MCLR mortgages are highly dependent on term premiums, operating costs borne by banks, marginal costs of funds, and negative carry-over CRR.


Final Words:


MCLR offers the much-needed respite of lowered interest rates that borrowers require, but only borrowers with a floating rate of interest on home loans can enjoy it. MCLR doesn't affect the fixed rate of interest on home loans. it's important to recollect that the bank considers deposit balances also as other borrowings while it computes the incremental cost of funds.