ATM :: All you want to know about MCLR linked home loans

Magicbricks | Jan 30, 2017, 03.39 PM IST | Times of India


Banks have adopted the Marginal Cost of Funds based Lending Rate (MCLR) by replacing the base rate system, starting April 1, 2016, as per the Reserve Bank of India’s (RBI’s) guidelines. Why was this done? “The RBI wanted to reduce the time taken by banks to pass on the benefits of rate cuts to borrowers. Banks were seen to be reluctant to cut rates, which meant that customers continued to repay loans at higher rates. Therefore, the RBI devised the MCLR system under which rates are revised more frequently and the benefits of any cut are passed to customers immediately,” says Adhil Shetty, CEO, BankBazaar.

While talking to Magicbricks, State Bank of India, Chief General Manager, MG Vaijinath pointed out the key points that consumers should adopt to get into the MCLR system.

Customers who have taken loan before April 1, 2016 does not have to do anything. The bank they are affiliated to will automatically reset the link. Those who have not opted for Base Rate, they need to decide whether or not to link their accounts to MCLR. If a customer decides to the former, then a simple handwritten consent letter needs to be submitted to the bank.

For the first year, SBI will not migrate the new customers and therefore they will continue to pay 9.5% under Base Rate. On completion of a year, the reduction rate amount can be enjoyed by the customer from the bank without paying anything extra.

Those who want to stay in the 11% rate, the bank will issue a new home loan. This is because every loan under the Base Rate when given to the client was decided on the basis of higher rate. The bank would now migrate the client to lower base rate which translates to refinancing.

Earlier the rate was 5% of the loan without any ceiling but now it has been reduced to Rs 25,000 for loans up to Rs 3 lakh.

If you take an MCLR-linked loan, the interest rate that you pay will be subject to changes at fixed intervals, as per the tenure for which rates are linked.

Banks also charge a premium over the MCLR rate for the particular loan instrument linked to it. For example, a bank may have one year MCLR at nine percent, but it may charge a higher rate, say, 9.20 percent or 9.40 percent, keeping a 0.20 percent or 0.40 percent margin over the base MCLR rate.

If you are an existing borrower servicing a loan based on the base rate system, you are allowed to switch to the MCLR system without any additional charge. But a switch from your existing bank to another can involve charges like processing fee and administrative charges.



  1. Valroy

    In Dec 2014 – I obtained a loan from HDFC at ROI of 10.15% (RPLR 16.75 -VS 6.6).

    The RPLR reduced 3 times, since 2014 and HDFC “automatically resets” 4 times a year – how does SBI compare.

    While they reset” every quarter – automatically – you do not get the impact of the variable spread – automatically.

    But they allow you to convert to the lower rate for a %fee. I need to check how many times is a borrower allwoed to “convert” From your article above – SBI allows it once in the life time. BUT thanks to MAX Gain apparantly there is regular savings also. Which I need to explore when comparing benefits of both PSU and PVT

    • Integradmin

      Very valid question Valroy. Under the erstwhile Base Rate system applicable to all banks, the rate would change at every instance of announcement in ‘change’ (reduction or increment) in Base Rate. However that is history. Whereas Housing Finance Companies like HDFC continue to operate on RPLR which can ‘change’ as per interest rates movement.
      With the introduction of RBI prescribed MCLR system, since most Banks including SBI uses the ‘1-year MCLR’ for Home Loans, the rate is only reset every anniversary date (date at 1st disbursement). Existing Bank customers would therefore get the effect of rate change only once a year, and any ‘change'(reduction or increment) in MCLR during the year will not apply to them.
      The above applies to SBI MaxGain as well. Because of the overdraft facility where a customer can withdraw surplus prepayments made in the account, you tend to leave all your cash in this account thereby saving by way of interest applicable only on net outstanding. Net effect of this savings is in reduction of repayment tenure. Hence MaxGain tends to score over pure Term Loan (which most Banks & HFCs offer).

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