What Is The Meaning Of MCLR And What Is Its Impact On A Home Loan?

MCLR or marginal cost of funds based lending rate refers to an internal benchmark rate below which financial institutions cannot lend money to their clients. Financial institutions add a spread over this minimum rate and determine their rate of lending. This methodology of fixing rate of interest was first introduced in July 2016 to replace the previous base rate system.

This benchmark rate was introduced to ensure –

• Availability of credits at an interest rate that is convenient for both borrowers and lending institutions.

• Quicker revision of lending rates offered by financial companies in accordance to the policy rates.

• Transparency in the methodology of determining the rate of interest.

The introduction of the MCLR rate of interest brought in uniformity to the lending process and brought in accelerated sensitiveness to the market policy rates. Under this regime, it is imperative for financial companies to adjust their rate of interest following a change in the repo rate.

What Is Repo Rate And How Does It Affect The MCLR?

1. Definition

Any nation irrespective of its current financial stability is subjected to occasional inflation and deflations. While the country’s economic authority intervenes to pull the economy towards a steady balance, it involves the usage of financial tools like repo rate and reverse repo rate.

• Repo Rate – Rate at which financial institutions borrow funds from the Reserve Bank of India is called repo rate (5.75% as per June 2019.)

• Reverse Repo Rate – Rate at which the Reserve Bank of India borrows funds from financial institutions to deal with issues of deficit of liquidity and funds across the national economic market is called reverse repo rate (5.50% as per June 2019.)

Both these have specific roles to play in regulating the liquidity framework and stability of prices of goods and services. The impact of repo rate on marginal cost of funds based lending rate needs a detailed discussion.

Impact on MCLR

Repo rate as a monetary measure is efficient to control the inflation situation in economies. It is directly proportional to the marginal cost of funds based lending rate.

Considering the impact of this benchmark rate to repo rate fluctuations, one can witness a drastic change in the credit market as a result of MCLR and its effects on loans. In cases of a lower rate of interest, potential borrowers show more interest in availing advances that would help them meet their personal and professional financial goals. It is especially true in case of secured advances like home loans that involve lending a hefty amount for an extended period.

What is the impact of MCLR on home loans?

The rising prices in the real estate market and a simultaneous escalation in the housing sector led to the popularisation of home loans over the last couple of years. Various Government initiatives, including the launch of RERA Act and PMAY CLSS (Pradhan Mantri Awas Yojana Credit Linked Subsidy Scheme), contribute to this rise in demand.

However, a robust increase in real estate scenario prices is often a concern for potential buyers. Keeping such a financial crunch in mind, the RBI often utilises its power over the Indian economic sectors by lowering the repo rate. As for the domino effect in the Indian economy following this, here is a step-by-step analysis to propel a better understanding of the same –

Step 1: A decrease in RBI repo rate is followed by a decline in the lending rate of financial institutions.

Step 2: The competitive rate of interest attracts the interest of potential buyers who look forth to increased affordability of EMIs and hence, chances of increased repayment capability.

Step 3: An increase in disposable income soon follows with an escalated purchasing power.

Step 4: This increases the propensity to consume or leads to a rise in consumption power.

Such a decrease in the rate of interest is especially beneficial in cases of long-term credits like home loans. Add on to this the chances of further reduction in interest rate owing to PMAY. Thus, with Home Loan from reputed lenders like Bajaj Finserv that complies with the Pradhan Mantri Awas Yojana borrowers can take advantage of a host of beneficial features –

• Easy balance transfer facility.

• Property dossier.

• Flexible tenor options ranging up to 240 months.

• Customised insurance schemes.

• Zero charges on foreclosure and part prepayment.

• High-value loan amount of up to Rs. 3.5 Crore along with a top-up value of up to Rs. 50 Lakh.

Availing such beneficial credits is convenient considering one knows how to get a home loan and apply for the same via a hassle-free application process. All that one has to do is meet a few eligibility criteria and furnish some essential documents.

Thus, taking into account the crucial impact of MCLR on loan EMIs, it is ideally beneficial to go for a floating rate of interest since this will leave a borrower with a lower cost of a loan. Make sure to compare lenders before settling upon one. Make informed decisions ensure that you enjoy an easy repayment for the loan you avail.