Marginal Cost Based Lending Rate (MCLR) is based on the marginal cost of funds, tenor premium, operating expenses and cost of maintaining cash reserve ratio. It is also influenced by the interest rate for various types of deposits, borrowings and return on net worth. All of this concludes that MCLR is largely determined by the marginal cost of funds, especially by deposit rates and repo rates.
After the MCLR rate cut, there was a fall in the wholesale rate as well as the retail liability rate. If you choose to go ahead with a floating rate loan, MCLR is the benchmark rate to which your loan will be linked. The rate cut which has happened and the market expecting another round of rate cut will get reflected on the overall lending rate cut. The bank revised its six-month and one-year MCLR by 5 bps to 8.80% from 8.85% and 9% from 9.05%, respectively. A home loan has a benchmark rate and a spread, which is basically a margin over the benchmark. For a new borrower the loans will be much cheaper. Some banks also provide home loans on MCLR without spread.
Reduction in interest rates on home loans
The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019).
Reduction in fixed income returns
In line with the reduction in key rates, recently, the State Bank of India (SBI) reduced interest rates on fixed deposits (FD). The interest rate cut has been sharper for short-term tenures, i.e., up to 179 days by 50-75 bps. However, for longer tenures, the bank cut rates by 20 bps. The new rates came into effect from August 1.
How does it impact you?
For an existing home loan borrower, there will be no sudden impact of a cut in MCLR or spread. When the MCLR came into effect on April 2016, the floating rate loans got fixed to the tenor of the MCLR. Therefore, if your home loan is linked to six-month MCLR, your interest rate will get reset only after completing six months, in case of any changes. If it is linked to one-year MCLR, the loan gets reset after a year and likewise.
But for an existing home loan borrower any change in the spread will have no impact as the spread remains the same throughout the lifetime of the loan. If you are a new borrower, loans will be cheaper for you. Some banks will provide you with loans on MCLR without spread, which can be an option to consider. As soon as the other banks follow this suit, you will see a further impact on your existing MCLR too, however marginally. A rate cut in MCLR also means that you can expect a change in the fixed deposit rates as well.
Starting from 1st April 2016, all banks in India are required to benchmark and price their loans to Marginal Cost Based Lending Rate (MCLR). As MCLR is closely linked to the repo rate, it improves the transmission of RBI’s repo rate cut to the end borrower. Home loan and loan against property schemes are called floating-rate loans. These loans are benchmarked to the MCLR rates. Some banks also offer fixed rate housing loan and property loan under special schemes. Fixed-rate loans like personal loan, business loan, car loan and gold loan are independent of MCLR rates.