If you are looking for a home loan from any bank, there are quite a few things to know before you walk into a bank branch. From April 1, 2016 all banks have been asked to link all their loans including home loans to the bank’s MCLR. Interestingly, only banks are supposed to declare and link home loan to their MCLR, while the NBFC’s and other lenders are not required to do so and may fix the home loan rate based on their own cost of funds.
As a home loan borrower, it is important to understand that the home loan rate offered by the bank will be determined by three important factors – The bank’s MCLR, The Reset Period and The Mark-Up. Let us see how each of them impacts your home loan.
1. The bank’s MCLR
The first thing you need to ask the bank is their MCLR rate, which will determine how much home loan interest rate will you be paying. A higher MCLR will effectively mean a higher home loan interest rate and thereby, a high-interest burden, keeping other factors constant. All banks carry their MCLR rates on their websites and one may view them for comparison.
2. Re-set period
Even though the banks are supposed to declare overnight, monthly, half-yearly, yearly MCLR, in case of home loans most banks link their loan to the bank’s 12 month MCLR, while few link to 6-month MCLR as well. This will be the re-set period of the home loan. If a borrower chooses a 12-month period, the home loan ( and hence the EMI’s) will be reset at the end of 12 months. In case of 6-month period, it will be reset after 6 months.
Example: Say, one takes a 12-month rest period home loan in March 2019 when the bank’s MCLR is 8.9 per cent. Over the next 12 months, bank’s MCLR falls to 8.8 and then rises to 9.10 per cent and in March 2020 it settles at 9.25 per cent. As 12 months period gets over in March 2020, the borrower new home loan rate will be set at 9.25 per cent.
Impact: During the falling interest rate scenario, a 6-month period helps as reset will happen early thereby reducing EMI’s faster. However, in a rising interest rate scenario, the reverse helps.
3. Mark-up in loan
Banks are not allowed to lend below their MCLR but are allowed to charge a mark-up or a spread over their MCLR. Currently, very few banks lend at MCLR while most of them have a spread.
Example: Say, a bank’s 12 month MCLR is 8.75 percent and it has a mark-up of 25 basis points. It means the effective home loan interest rate for the borrower is 9 percent.
(i) As a borrower, remember that when RBI brings about a change in the repo rate, there may not be no immediate impact on your EMI in the same or next month. The EMI will be reset after 6 or 12 months as per the contract.
(ii) If two banks have the same MCLR, it is not necessary that they have the same home loan rate. This is because of the mark-up.
(iii) The Mark-up mentioned in the agreement papers will remain same unless the credit profile of the borrower changes drastically.