Every loan borrower wants to ensure that they get the lowest home loan interest rate since it determines the EMI payments and the loan tenure. To offer relief to home buyers, the RBI had introduced the Base Rate in 2011 and the MLCR in 2016. As there is only a difference of few years between the introductions of the two rates, many borrowers who were paying the home loan interest according to the home loan Base rate don’t know whether they should make a shift to home loan MCLR. But before you decide, you must know the difference between the Base rate and MCLR.
Chronologically the Base rate came into effect in 2011, before MCLR. It replaced the earlier Benchmark Prime Lending Rate (BPLR) which governed all loans. The Base rate can be defined as the lowest interest rate below which a financial lender is not permitted to offer loans. The home loan base rate decided by the RBI is the minimum interest rate which a lender is obligated to charge.
The MCLR stands for Marginal Cost of Funds Based Lending Rate and is the minimum interest rate which lenders must charge when a borrower takes a loan. Financial institutions cannot grant a home loan below the home loan MCLR unless RBI makes an exception. Ever since its introduction in 2016 to replace the Base rate system, MCLR is the internal benchmark of interest rate, which governs the interest rates for all loans in India. No financial institution is permitted to offer loans at interest rates lower than the MCLR.
Both MCLR and Base rate were introduced in their specific junction of time with the motive to better the transmission of the monetary policy. They were introduced to bring about enhanced transparency in the process which financial institutions follow for selecting home loan interest rates.
MCLR vs Base Rate
In MCLR vs Base rate discussion, you can see that the objective of both MCLR and Base Rate seem similar, but there are some essential points of difference between the two.
- The MCLR is determined by the current, marginal or incremental cost of funds.
- The MCLR is calculated keeping in mind the tenure premium which is earned by the financial lender. The tenure premium is charged by the financial institutions for the risk associated when lending for higher tenures.
- MCLR depends on the changes in the Repo rate set by RBI.
- Financial institutions have to submit the MCLR for overnight, one-month, three-month, six-month and one year maturities.
- The Base rate is determined based on the average cost of funds.
- The Base rate is calculated by considering the profit margin or the minimum rate of return of the financial institution.
- Base rate does not depend on the Repo rate set by RBI.
- Base rate varies from one financial institution to another, due to the difference in the interest rates provided on deposits or average cost of funds.
If you are thinking about shifting your home loan base rate to home loan MCLR, thoroughly research the amount of benefits you will get.
If you are looking to apply for a home loan, remember to check your home loan eligibility. Once you have checked that, then apply for a loan online.