Confused Between the MCLR Rate and the Repo-Linked Rate? Here is what to Know about Home Loan Interest Rates

Comparing interest rates is the first and likely the only thing that most people think of doing whenever they consider getting a house loan or switching from one lender to another, isn’t it? After all, your home loan’s total cost is primarily anchored by the interest rate. But therein lies the problem.

Although interest rates are an important feature to consider when comparing different home loan lenders and even when transferring through a house loan balance transfer, there are additional considerations that you should make. Do you know which ones? Let me explain the less well-known factors you should consider while comparing the interest rates of mortgage lenders, whether for a new mortgage or a balance transfer.

Periods when loans reset frequently

The RBI has outlined the loan interest rate frequency in the repo rate or other external benchmark regime that was adopted a few years ago. It must be reset by banks at least once every three months. Additionally, for the previous Axis Bank MCLR Rate regime, the existence of pre-set loan reset dates in the HDFC MCLR Rate regime means that your EMIs are not immediately impacted because the house loan interest rate is probably not going to alter right after any such announcement, at least until the next reset date arrives. This aids in lowering or at least preventing a sudden increase in interest costs during an era of rising interest rates.

Simply put, a longer reset period gives you more time to decide what to do next before the loan’s next reset date approaches. Even under RBI guidelines, banks are allowed to make loans with reset dates that are either tied to the date of the loan’s initial disbursement or to the date of the HDFC Bank MCLR Rate review. More importantly, this information must be included in the loan agreement so that the borrower is aware of the date on which the loan resets.

Current lender’s benchmarking policy

When commercial banks in India experience a short-term funding constraint, specifically, the RBI, the country’s central bank, loans to them at the repo rate. Therefore, as a borrower, you must first comprehend how banks determine their lending rates. This will assist you in making the best decisions possible without relying just on hearsay or prejudicial viewpoints.

Keep in mind that Axis Bank MCLR Rate is determined by several factors in addition to the repo rate. In addition, when determining their lending rates, banks take into account their cost of capital, operating expenses, and tenor premium. Together, these three elements and the repo rate have an impact on the interest rate for house loans.

Regarding MCLR, it is a benchmark interest rate that a bank cannot lend below on an internal basis. On account of changes in the RBI’s policy rates, the HDFC MCLR Rate-based system delivers higher transfer of benefits to borrowers than the base rate system and is more transparent than the latter.

Remember that the RBI has ordered all banks to examine and disclose their MCLR on a monthly basis for all MCLR tenures, such as 3 months, 1 year, etc. The quantity of the loan and the customer’s credit profile, including credit score and repayment capabilities, might affect the markup (spread) that banks can charge over their MCLR.

As a result, the effective rate of interest, or the rate the borrower would actually be required to pay for the loan, would be established after accounting for the HDFC Bank MCLR Rate plus any applicable markup. Existing home loan customers must keep in mind that their current EMIs won’t change instantly during increasing rate regimes; rather, they will only be affected when the home loan’s reset date comes around.

Timing of choices regarding balance transfers

The ideal situation for house loans is one with low interest rates, like the one we currently have. Who doesn’t want to obtain inexpensive interest rates and achieve their dream of home ownership, after all? It is crucial to consider the timing of your decision by examining the current and projected economic environment as well as interest rate forecasts.

Don’t just choose a balance transfer out of the blue if the RBI adjusts the repo rate, and there is a likelihood that the lender’s rates may alter. Recall that the repo rate is one of the elements, not the only factor, in determining the Axis Bank MCLR Rate. An increase in the repo rate does not automatically translate into an increase in the lender’s MCLR.

Additionally, before agreeing to the lender offering a lower rate, you should consider the “total savings in interest cost” even though the MCLR for house loans has increased and your present home loan’s interest rate is scheduled to increase when the loan reset date arrives.

What to consider before transferring your balance

Borrowers must make sure they evaluate the rates offered by other lenders as well as determine the possible savings in interest costs upon transferring the loan to the chosen lender. They should not simply focus on the lender offering a lower interest rate than that of a house loan.

Consider any applicable fees and charges before submitting an application for a balance transfer. Your request for a balance transfer is typically treated by the new lender as a new application for a home loan, and as a result, they have the authority to impose fees and charges like loan processing costs, administrative fees, and so on.

Consider the following advantages of a balance transfer in addition to the overall interest savings:

Better loan features with a new lender: Since your request for a balance transfer can bring you better loan features in addition to a cheaper home loan rate, why not take advantage of this benefit? That’s not all, either.

You can ask the new bank or HFC to extend the loan payback term if you wish to lower your EMI payment.

Jumping from the base rate regime to the HDFC Bank MCLR Rate regime: If you are currently servicing home loans under the base rate regime, which is highly unlikely but could happen, you should act quickly and choose a balance transfer in order to switch to Axis Bank MCLR Rate or an externally benchmarked rate, such as a home loan based on the repo rate. Due to greater transparency in transmission and rate setting, the repo rate regime is superior to the base rate regime, while MCLR linked regime is somewhat better.