The banks have to change their policies according to the changing economic conditions of the country. These changes can have a major effect on various working sectors of the country. MCLR reduction was one such decision which has created a stir among the people of the country. To be more specific the MCLR reduction was done in the Home Loan interest rates. Due to the decrease in the interest for a housing loan, people have become more interested in applying for it.
What is MCLR?
The central bank on 1st April 2016 introduced a new way for the bank to decide the lending rates, this lending rate would be decided on the basis of the marginal cost of borrowing. After 1st April all the banks had to provide the loan under the MCLR rule. To arrive at a final lending rate the MCLR takes into consideration the marginal costs of funds for the banks.
Is MCLR reduction beneficial?
The benefit of reduction of MCLR is dependent on various factors.
- The interest rate according to which the money was borrowed – The benefit of MCLR will not be available if you had applied for the loan on a fixed rate. The interest rate will not reduce because the interest rate is fixed for an agreed tenure for your loan.
- If you have applied for the loan before 1st April 2016 then your loan would be under Prime Lending Rates (PLR) or the base rate. And the benefit of reduction in the MCLR will not be applicable you. You will only get the benefits once there is a reduction in the PLR or the base rate.
Effects of MCLR on Home Loan interest rates
If your loan is applicable under the MCLR rule, your interest rate will not change with every change in the MCLR. The banks have a permission to change or reset the clause in the lending agreement. The premium which the bank charge over their MCLR for a loan, is referred to as ‘spread’ which is shown as certain points over the base rate.
If you have borrowed the money under the PLR and want to change it into MCLR here are the steps you can follow.
You change from PLR to MCLR by paying the applicable charges levied by the banks. You can also switch between banks or lenders after considering the cost and the interest rate that will be applied to you on the whole tenure.
You can avail the benefits of the reduction of the interest rate. If you switch the loan from the current bank due to which the loan rate will shift from PLR to MCLR. In case you have shifted your loan from MCLR to base rate regime, then the benefits that you might get will not be much significant. It will only be applicable when the bank announces the reduction in its base rate.
What can you do to change from PLR to MCLR?
If you have availed the loan under the PLR rule and want to change to MCLR you can pay the applicable charges to the banks and get your interest process shifted. You can also change from PLR to MCLR by switching the loan between the lenders after considering the Home Loan balance transfer charges and interest rate offered by the other lender.
The factors to keep in mind while making a loan shift
You have to look for the change in the interest rate that you are paying now in comparison with the interest rate that is being offered to you.
You have to keep the tenure of the loan repayment. If your loan is under floating rate then, the banks might not charge you the pre-payment penalty.
Due to a reduction in the MCLR, the Home Loans might get cheaper and this will encourage people to buy property. This might lead to increase in the demand for the houses and might also increase the property rates in the country.