When applying for a housing loan, understanding the significance of interest rates becomes important. One term often used in this context is MCLR. The full form of MCLR in banking is the Marginal Cost of Funds Lending Rate, a pivotal factor influencing the interest rates on various loans, including housing loans.
MCLR can be defined as a dynamic interest rate scheme that analyses the cost of funds and several external factors to calculate lending rates. This rate is vital for becoming a homeowner as it directly affects the interest applicable to your housing loan.
This blog will discuss the importance of MCLR and how it could affect your ability to obtain a housing loan in India.
What is MCLR in Banking? – Unraveling the MCLR Full Form in Banking
Know what is MCLR is an internal standard rate banks use to determine the interest rates for various loans. It portrays the bank’s cost of funds and is affected by aspects such as:
· The repo rate,
· Deposit rates,
· Operating costs.
Given below are a few vital aspects of MCLR you need to know about:
· MCLR Components: MCLR is influenced by several components, including the cost of funds, the repo rate set by the Reserve Bank of India (RBI), operational expenses, and the return on net worth. These factors collectively determine the MCLR rate for a bank.
· Tenure of MCLR: Each bank estimates its reset period for MCLR, ranging from one month to one year. During this period, the housing loan interest rate remains unaffected. Your interest rate may be revised based on the latest MCLR when the reset period ends.
The Impact of MCLR on Housing Loans in India
The aspects of your housing loan that MCLR can impact have been discussed below:
· Interest Rate Reset: MCLR-based housing loans have predefined reset periods, typically one month to one year. Your interest rate may change based on the updated MCLR when the reset period ends.
· Interest Rate Transparency: MCLR-based loans offer transparency, as banks are required to publish their MCLR rates. This enables you to recognise how your interest rates are calculated effectively.
· Impact on EMI: Changes in MCLR can affect your Equated Monthly Instalments (EMIs). If it increases, your EMI may rise, potentially impacting your budget.
· Impact on Loan Tenure: Fluctuations in MCLR can also affect the overall cost of your housing loan. Higher MCLR rates may lead to a longer tenure to maintain affordable EMIs.
· Balance Transfer Consideration: Borrowers often consider transferring their housing loans to banks offering lower MCLR rates to reduce interest costs.
Factors Influencing MCLR
The key factors that can influence your MCLR are mentioned below:
· Repo Rate: The Reserve Bank of India’s (RBI) repo rate significantly determines MCLR. Changes in the repo rate can lead to adjustments in MCLR.
· Operating Costs: A bank’s operating costs, including administrative expenses, employee salaries, and infrastructure maintenance, affect its MCLR.
· Deposit Rates: The interest rates on bank customers’ deposits can also influence the MCLR.
How to Navigate MCLR-based Housing Loans?
The ways through which you can easily navigate through MCLR-based housing options have been given below:
· Research: Before availing of a housing loan, research the MCLR rates of various banks to choose the one that aligns with your financial goals.
· Understand Reset Periods: Know the reset period of your chosen MCLR-based loan. It will be helpful for you in addressing changes in your interest rates.
· Budget Flexibility: When planning your budget, account for potential changes in EMIs due to MCLR fluctuations.
· Consider Balance Transfer: If you find more favourable MCLR rates elsewhere, consider transferring your loan to save on interest costs.
· Regularly Monitor MCLR: Stay informed about changes in MCLR rates to make timely decisions about your housing loan.
Your interest rate, EMI, and total loan cost are all substantially impacted by it. You can make well-informed decisions and navigate the housing loan market more efficiently if you keep up with the latest updates on MCLR.
Therefore, be proactive and well-informed to successfully manage a housing loan in an MCLR-based system. Keep an open eye on new economic updates, as changes in the repo rate can substantially impact MCLR rates.