Home Loan Rate Saga Difficult to Fathom without Understanding MCLR

The demonetization of higher currency notes, as expected, brought about a massive rise in the bank deposits, making it easy for the lenders to lower their home loan rates. While Bank of Baroda (BoB) has slashed its 1-year MCLR to 8.35%, State Bank of India (SBI) cut the same by 90 basis points to 8%. Whereas, the private lender ICICI Bank cuts its 1-year MCLR to 8.20%. So, do you know how does MCLR influence the home loan rates? If not, then this article could tell you the same. So stay tuned as we crack the mystery of MCLR below.

Origination of MCLR

The Reserve Bank of India developed the concept of Marginal Cost of Lending Rate (MCLR) to reverse the trend of the inadequate response from the banks with respect to the changes made in the repo rate by the central bank. The repo rate signifies the rate at which the commercial banks borrow from the RBI for their short-term needs. All floating rate loans from April 1, 2016, onwards have already come under the MCLR regime. Typically, it’s home loan that is readily available at floating rates by most lenders. And when you think of its tenure that’s as long as 30 years, you can make hay in times of falling MCLR. However, the downside is the escalating lending rates in the wake of increasing MCLR induced by the hike in repo rates. But since the MCLR is on a declining trend and could continue to fall for a fair length of time, the home loan rates are expected to plunge further. So, the time is ripe for home loans as one would speak of.

home loan rates

What Does MCLR Include?

The bank arrives at MCLR based on the following points.

Operating Expenses-The day-to-day operational cost of the bank is referred as operating expenses

Cost for Maintaining Cash Reserve Ratio– Cash Reserve Ratio (CRR) determines the amount of cash that the commercial banks have to keep with the RBI. The bank does not receive any interest on the said deposit, thus becoming its cost.

Marginal Cost of Funds- The costs borne by the banks in the form of interest offered on savings and fixed deposit accounts, as well as the short-term borrowing rate i.e. repo rate.

Tenor Premium-This is an additional interest slab over the base rate based on the loan tenure.

Approach of Bank Towards Setting MCLR

The bank publishes the MCLR on a monthly basis subsequent to revising it once a quarter. The MCLR for different periods is announced by the bank. The bank publishes MCLR for a fortnight, month, a year, two years and three years. Whatever changes are brought in the 1-year MCLR, the interest rates on a home loan undergo a change. The banks are mandated to specify the rate reset frequency in the loan agreement paper.

There is a catch here to unfold. Want to know what is it? Many borrowers carry the false notion that every MCLR change brings a change in the lending rates. Actually, the loan will be serviced at 1-year MCLR as applicable on the date of loan disbursal for 1 year. For example- You got the receipt of the home loan on 31st August, 2016. The 1-year MCLR applicable at that time was 9.05%. The benchmark rate will continue to apply for a year i.e 31st August 2017. After that, the loans will be repriced. The MCLR changes are applicable for new loans only.  

Differentiate between Benchmark Rate and Lending Rate

The lending home loan rates are a sum of 1-year MCLR plus the spread. At the start of the ongoing year 2017, SBI bowled a ‘Googly’ to stump out many of its competitors by announcing a 90 basis point cut in the benchmark lending rate. At the beginning, everyone thought that the home rates had fallen to 8%. But in reality, the MCLR was brought down to 8% from 8.90% earlier. The lending rate was 8.60%-8.65% per annum, 60-65 basis point above the benchmark rate. Even though the lending rates fell, but the spread over the 1-year MCLR was more than what was earlier. Before the development, the spread over SBI’s 1-year MCLR was 20-25 basis points, lower than what it is now. In this way, the bank has reduced the transmission of rate cut benefits even by offering the home loan at lower rates.

Home Loan Rates of Few Banks and Housing Finance Companies

State Bank of India- 8.60%-8.65% p.a.

Bank of Baroda- 8.35%-9.35% p.a.

ICICI Bank- 8.65%-8.85% p.a.

HDFC Limited- 8.65%-8.75% p.a.

Indiabulls Housing Finance- 8.65%-8.85% p.a.

So, this was MCLR and its impacts on the floating rate home loans. Hope you have understood the phenomenon well to get your dream home soon.

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