Is it Beneficial for Home Loan Borrowers to Shift from Base Rate to MCLR Rate?
By Anupama Deshpande | May 08, 2018

MCLR (Marginal Cost of funds based Lending Rate) is the minimum rate of interest below which the bank cannot lend the loan, with an exception of certain cases as approved by the RBI.

It will be beneficial for them to switch to MCLR linked rate if the difference between what they are paying (under base rate) and what the bank is offering (under MCLR) is significant. So they must switch to MCLR linked rates, if outstanding loan is high and the remaining tenure is also long.

In that situation, Base Rate Borrowers have following two options:

(1) Switch to MCLR linked home loan with the same bank: It is beneficial, in case the bank is charging a nominal switching fee such as 0.50% or less on outstanding amount.

(2) Balance Transfer the loan to another bank on MCLR: It is feasible, if new bank has waived off processing fee (which they generally do in order to attract the customer and increase their business) or is charging very less processing fee and legal and transfer costs.

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The borrower must compare both the above-mentioned options and opt for the one which is more beneficial to them in terms of money saved. It will result not only in reduction of future EMIs but also a huge amount of interest will be saved during remaining tenure.

One main point to consider before taking the decision of switching from base rate to MCLR is that it will depend greatly on the cost of switching and the actual benefit received after the switch. Switching cost may be in the range of Rs 5,000 to Rs 20,000 depending upon banks. Some banks do not charge a switchover fee and allow the base rate borrowers to switch from base rate to MCLR without paying any charges.

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One example to explain the calculation of the cost of switching and the actual benefit received after the switch is: Suppose Mr Ajay has availed a Home Loan of Rs 40 lakhs in 2015 at base rate of 10% for 25 years tenure. Presently, he is paying an EMI of Rs 36,348 per month. Now he wants to shift his home loan from base rate to MCLR. Under MCLR the interest rate he is offered is 8.40% per year. After switching he will have to pay an EMI of Rs 31,940 for the same loan amount and for the same tenure. He has to pay Rs 15,000 as a switchover charges. On comparison, it is very clear that switching for him is profitable for him in this case as he is saving Rs 4,408 every month on EMI and this switchover charges will get recovered in mere 4 months then he will save Rs 4,408 every month for 24 years & 8 months.

The home loan borrower may continue the loan on base rate, especially, when the maturity of loan is near and in such a situation, he/ she needs not go through the process of conversion.

Further, the Reserve Bank (RBI) is linking the base rate for loans given by banks to the MCLR from April 1, 2018. Once it happens, the base rate will automatically increase or decrease along with the MCLR without any specific action required for adjustment. This will be very beneficial for those home loan borrowers whose rates (EMIs) are still linked to the base rate.

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