MCLR Vs Base Rate: What Should You Select for Your Home Loan

After demonetization by the Government of India, all the banks have reduced their loan interest rates. This is the right time to buy your dream home. When SBI has cut the MCLR by 0.9%, everybody cheers in the market. Slowly all other banks followed the same principle. Many of home loaners also started enquiring about the MCLR. The certain question which appears in everyone’s mind is that MCLR vs base rate which is beneficial.

RBI introduced the Marginal cost of Lending (MCLR) on April 1, 2016, and consistently pushed banks to follow MCLR instead of the base rate for the consumer loans. Banks are continuously guided by Reserve Bank of India (RBI) to apply this rate for their loan rate calculation.

Also Read: Five Reasons Why You Should Not Prepay Home Loan

The Government of India is also encouraging the housing sector with its various schemes under Pradhan Mantri Awas Yojana Scheme and also launched the Real Estate Regulatory Authority (RERA) for transparency.

 

What is Base Rate?

The base rate is the minimum interest rate at which bank gives the loan to the consumers. Base rate depends on various factors such as deposit rate of banks, profit, the cost of banks etc. It is independent of repo rate of RBI. Bank can change base rate every quarter.

What is MCLR?

When RBI is reducing the repo rate continuously, the banks are not passing the benefit to consumers as the base rate calculation is different for different banks. Then RBI starts guiding the banks to calculate marginal cost of Lending rate (MCLR). RBI also pushed the banks to adopt the MCLR in place of base rate to make the banking system more transparent. MCLR depends on the marginal cost of funds; cash reserve ratio (CRR), operating cost and tenor premium. MCLR can be different for the different tenure of the loan.

MCLR vs Base Rate:

Now we will know about the benefits, disadvantages of MCLR and Base Rate and should we switch our home loan from existing base rate to MCLR. Where will we get the maximum benefit?

Consider an outstanding home loan of Rs 20, 00,000 based on base rate and taken before April 1, 2016. The SBI base rate was 9.55% for Men and 9.5% for Women before January 1, 2017.

Now, the SBI has slashed the MCLR by 0.6% and currently it is 8%. SBI charges 0.65% over MCLR which put the effective interest rate as 8.65%. This MCLR is applicable for new a loan which is taken after the effect of this new MCLR.

If you change the home loan from base rate to MCLR, the interest rate will certainly go down. You can get the benefit of this new MCLR by giving conversion fee to your bank. Bank generally charges 0.5% plus tax on outstanding home loan as conversion fee.

If you have taken home loan after April 1st, 2016 and it is already based on MCLR you have to pay the conversion fee to apply the new MCLR. Most of the individual can reduce their SBI home loan interest rate with the help of this conversion.

There is an annual reset clause of MCLR available with most of the banks. According to this rule, the interest rate of the home loan is to be reset every year on the basis MCLR available at that time. Suppose you have taken a home loan on April 2016 based on MCLR available that time. This rate will be reset on every year April with the applicable MCLR at that time.

State Bank of India, ICICI Bank and Bank of Baroda are the three banks who have reduced the MCLR drastically after demonetization. But the other banks have did not reduce their MCLR too much. Such as IDBI bank has now MCLR of 9.1% and the effective interest rate is 9.15%. Now their base rate is 9.5%. The change of home loan from base rate to MCLR does not give you the benefit as SBI or ICICI bank is giving.

Now before switching your loan to MCLR, contact your bank, calculate the benefits of reduced EMI or tenure with respect to conversion fee and do your cost-benefit analysis and take decision accordingly. Here you can think of balance transfer your home loan to SBI, ICICI bank. In this case, you have to remember the processing or application fee of the new loan in SBI or ICICI bank. The foreclosure charges of the existing loan are also to be checked with the home loan provider.

Also Read: How to Transfer Home Loan to Another Bank and Should You Do It?

Example:

Suppose your outstanding home loan is Rs 20,00,000 for five years and you are paying Rs 20,000 as an EMI. The interest rate is 9.5% and if you change to MCLR basis it will be 9.1%.

Suppose your outstanding home loan is Rs 20,00,000 for five years and you are paying Rs 20,000 as an EMI. The interest rate is 9.5% and if you change to MCLR basis it will be 9.1%.

Take the conversion fee as 0.5% of outstanding amount = Rs 10,000

The EMI you will save is approx. Rs 40,000 on the fifth year. But you have to pay Rs 10,000 right now. So, we have to calculate the value of Rs, 10000 at fifth year.

Considering 8% interest rate per year the value of Rs 10,000 will be Rs 14,700 at the end of 5th  year.

Hence, you can change your home loan from base rate to MCLR in this case.

Your thoughts, comments on the article are welcome in the comment section below the article. I will love to hear from you. 🙂

  • HANEE SRIVASTAVA

    Hi,

    I have SBI loan “SBI HL MAXGAIN OD(WOM-OCT15)” or 37lacs with 9.45% interest rate on March’ 2016. I would like to know, will my loan rates automatically reduces as its around 8% at the moment. If not, what should be the procedure and charges? Is there any benefit to move it to MCLR plan/any other plan?
    -Thanks,
    Hanee

    • Suman Kumar Gayen

      The MCLR is applicable from Apri1, 2016. So, your loan is on base rate, i guess. You have to fill up a form to change your home loan to MCLR basis to the bank and you have to pay a conversion charge along with the form. The conversion fee is normally 0.5% of outstanding loan plus service tax though it may varies bank to bank.

      • HANEE SRIVASTAVA

        Thanks Mr. Suman for the response. I can understand the process to make it converted into MCLR and bank is asking around 13K for transfer charges.
        But my question is that, is there any benefit on long run to transfer and spend such amount of charges to bank.

        -Hanee

        • Suman Kumar Gayen

          The benefit is based on the balance tenure, outstanding amount and the conversion charges what you have to pay. Please follow the example and do a cost benefit analysis. If the conversion amount gives you the benefit in terms of tenure or lower EMI, you can convert the loan to MCLR basis.

  • Vinay Kumar Bade

    Hi,

    Impressed with your responses. I availed home loan of 20LKS for 15 years from LICHFL in Nov’2013 and EMI is costing 21667/- per month. Now the current outstanding is 18LKS. As the interest rates are reduced I planned to transfer home loan to SBI. My question is it good decision to for long tenure or short tenure?. If Yes Long Tenure EMI will come down to 17000/- for example. I would like to plan some savings with the difference amount. Kindly advise which is the best decision to take and savings options!!

    • Suman Kumar Gayen

      I appreciate your query. It depends on the priority you give. If you want to be benefited financially, my suggestion would be to reduce the EMI. You cannot get a loan with such a cheaper interest rate and also take the benefit in income tax. Invest in an equity mutual fund with the balance amount and continue the loan. For more read the article Five Reasons Why You Should Not Prepay Home Loan.

  • Vinay Kumar Bade

    Thank you very much!!!

    • Suman Kumar Gayen

      Most welcome sir.

  • VIVEK YEDE

    Hi,

    I have Axis Bank Home Loan of 13,62000 with 9.15% Base interest rate on April’ 2017.
    I would like to know, can I transfer my loan to Axis MCLR from Axis Base Interest Rate.
    what should be the procedure and charges? Is there any benefit to move it to MCLR plan/any other plan?
    -Thanks,
    Vivek

    • Suman Kumar Gayen

      First, you check the effective interest rate on your home loan based on MCLR. Banks normally charge spread over MCLR. Then calculate the benefit considering the effective interest rate. Take the balance tenure into your account. Banks normally charge 0.5% +service tax on the outstanding amount. Compare both the figures and take decision accordingly.

      • VIVEK YEDE

        Thanks a lot dear for ur response…

  • Miss Uma Dhar

    I have a home loan with SBI of Rs.1400000/- . I am paying EMI of rs.15200/- . My loan tenure is 240 months. My loan amount was sanctioned on 17.03.2015 under base rate system. Kindly advise me shall I switch over the said loan to MCLR interest rate in the same bank

    • Suman Kumar Gayen

      Yes, you can switch over the loan to MCLR basis. But remember to be informed of the change over price which you need to pay to bank.

  • Satpal Singh

    i have home loan of 7 lakh from central bank of india. for 15 years.. my loan passed in December 2013.I repayed almost half of amount..remainning amount is 3 lakh 30 thousands.central bank of india base rate is 9.7%.Kindly advise me shall I switch over the said loan to MCLR interest rate in the same bank

    • Suman Kumar Gayen

      Approach to the bank and know what will be your MCLR applicable for the loan. Also, know about the conversion charges. Then calculate the interest benefit vis a vis conversion charges. Convert the loan if it is beneficial. However, for a small amount of loan, the benefit may be not much wrt the effort you put. 🙂

  • Swapnil Chavan

    I have Home Loan from Dena Bank of around 2400000 at the EMI of 22700 (10.5%) from October 2013, from Feb 2017 i have swich to MCLR, however bank told me that my EMI remains same and tenur will reduce, can i find out remaining tenur now. My MCLR rate is now 8.60%

    • Suman Kumar Gayen

      As you have not specified the outstanding loan before conversion, so I have taken Rs 22 lakhs. From 10.5% to 8.6% interest rate, you are saving approx. 30 months in your loan tenure. You can check the balance tenure from the bank also.

  • Anika Arora

    Is there any cap on maximum amount to pay for converting base rate to mclr? outstanding amount is 51 lacs and rate of interest is 9.4%. How much convenience fee I have to pay?

    • Suman Kumar Gayen

      As far as I know, there is no maximum limit on conversion fee. If you have faced such an issue, please elaborate your experience.

  • Suman Kumar Gayen

    Yes, you can convert the loan to MCLR basis.

    • sharda kotwani

      Thank you For Guidance.

  • Sharon Fernandez Sequeira

    I have a home loan with SBI 55L, current outstanding amt 21L i am currently paying 9.5 % interest, i want to switch but bank says their charges for switching is 3% on outstanding amount plus a 15% service charge, i thought that was ridiculous, don’t bank need to do this for free. Is it normal for such a high fee?

    • Suman Kumar Gayen

      I have not found such a high fee for conversion from base rate to MCLR. Generally, it is 0.5% – 1% of the outstanding loan amount plus service tax. You can also negotiate the fees, I guess. Otherwise, please approach the bank and tell them that you are going to transfer your home loan to other banks. Many banks are offering free processing for a new home loan. In this case, you don’t have to pay the conversion fees. You can also refer http://investdunia.com/how-to-transfer-home-loan-to-another-bank-and-should-you-do-it/

      • Sharon Fernandez Sequeira

        HI Suman,

        Thank you for your message, my bank just clarified it was 0.3% and not 3% so im happy 🙂 Thank you so much for your time and effort in replying to everyone

        • Suman Kumar Gayen

          Thank you sharing your experience.

  • Hemant Ghorpade

    Hi suman,

    Gone through article, It is good one!

    I do have my specific query. I took home loan in June 2010, AMOUNT Rs. 28,00,000/- My EMI is Rs. 28,000/- @SBI Maxgain Account. Loan outstanding is Rs.16,28,000/-. My Drawing Power is 25,43,000/- . Bank is asking processing fees of 0.3% on Drawing power, after paying processing fee I would save Rs.4,200/- for the period of One Year. This is my short term saving for a year.

    1. Bank should charge processing on Drawing Power or Outstanding Loan Amount?(Do I have negotiating possibility with Bank on this Point?)

    2. Changing Base Rate to MCLR IN Long Run beneficial?

    3.I heard that when interest rates are going down MCLR is good, but if Interest rates goes up Base rate is good. Could you please throw some light on this?

    4. What are possibilities of Going Home Loan rates Up in Near Future?

    With regards,
    Hemant

  • Suman Kumar Gayen

    Hi Mr. Hemant

    First thank you for liking the article.

    SBI maxgain loan is not like the other normal home loan product. Your pre payment towards the home loan is not considered as the payment towards the principal here. You can again withdraw it from the account. Your EMI and tenure is not reduced in that respect. That’s why bank is calculating the conversion fee on the drawing power what you are eligible for.

    You can also think of shifting your loan to another bank which offers free processing fee and also a lower rate. Refer http://investdunia.com/how-to-transfer-home-loan-to-another-bank-and-should-you-do-it/

    As of know it is beneficial to change the home loan to MCLR as it is continuously decreasing.
    In my view, as the inflation is going down and after demonetization, the money comes into the formal banking system, the rates will further go down.

    Moreover, MCLR calculation is more transparent and RBI is continuously pushing the banks to do the calculation as per their guidelines and norms, it would be wiser to shift the loan to MCLR basis.
    As nobody predicts the future, I am also not in a position to predict whether the loan rates will go up or not, request you to take advise from an investment adviser or a certified financial planner in this regard.

  • Hemant Ghorpade

    Hello Mr. Suman,

    Thanks for your detailed personalized reply.

    1. I heard that when interest rates are going down MCLR is good, but if Interest rates goes up Base rate is good. Is there any logic in this?

    2. In case of SBI Max gain EMI & Tenure is not reduced, but

    A. Are they calculating interest on loan outstanding Amount?
    B. Interest calculation on daily basis or Monthly?

    With warm regards,

    Hemant.

    • Suman Kumar Gayen

      I am not able to see any valid logic in context to your first question. If you have found out something, please let me know. I am happy to hear that.
      Your part payment towards SBI Maxgain loan is not contributing to the principal of the loan. Only interest burden is reduced. Hence, it seems logical to calculate the conversion charges based on total amount. You can also negotiate with the bank to reduce the charges.

      Regards,

      Suman