MCLR v/s Base Rate: Should You Switch Your Home Loan To MCLR ?

There’s a lot of buzz in the news because home loan interest rates have changed from 1st April 2016. The reason for this is that banks have started using a new system to calculate the interest rates for loans. This new system is called ‘Marginal Cost of funds based Lending Rate’ or MCLR (you might need to read the name a couple of times to remember it). This method has been created by RBI and it is mandatory for all banks to use MCLR for loans given after 1st April 2016. Till now, the Base Rate system was being used to calculate interest rate.

Base Rate vs MCLR

Banks announce their MCLR!

On 31st March 2016, State Bank of India became the first bank to announce its range of MCLRs. Lenders like ICICI, Axis Bank and IDBI Bank  quickly followed suit by announcing their own MCLRs. You might be confused as to why there are different MCLRs and not just one. Let us explain. Unlike Base Rate which was common for all loans, MCLR is different for loans with different tenors. Tenor is the period after which the interest rate of a loan resets. Basically, the MCLR will be published by the banks each month. If you take a loan with a 1 year tenor in April 2016, then your interest rate will reset in April 2017 and according to the MCLR of that month. And MCLR is different for tenors of 1 month, 3 months, 1 year and so on.

Let’s look at this information from the context of home loans. SBI & ICICI have decided that home loans will have a tenor of 1 year.

For SBI, home loans will be charged MCLR of 9.20%. To calculate the interest rate, SBI will add a Spread of 0.25% on top of the MCLR. Interest Rate = 9.20% + 0.25% = 9.45%. In Base Rate system, SBI’s Spread was the same and Base Rate was 9.30%. So, Interest Rate = Base Rate + Spread = 9.30% + 0.25% = 9.55%. So for SBI, there is a difference of 0.10% between interest rates on Base Rate and MCLR. Similarly, for ICICI Bank, the interest rate on the Base Rate system was 9.65% and on MCLR system, it is now 9.45%. This is a difference of 0.20%.

Great! It’s a lower interest rate! But wait. The question you should ask now is:

Will every home loan be on MCLR?

It is important to clarify this point – NEW home loans will be on MCLR but the loans which have been taken on or before 31st March 2016, will continue to be on the Base Rate system. Here, you have a choice. You can choose to stay on Base Rate till the end of your tenure or you can switch to MCLR. Which brings us to an important question:

Should you switch from Base Rate to MCLR?

For SBI, the MCLR is 10 basis points (0.10%) lower than the Base Rate. For ICICI it is 20 basis points (0.20%) lower than the Base Rate. Also, it is expected that interest rates are on a downward trend and when your interest rate is reset after 1 year, rates will be lower than they are today. So there is short-term benefit in switching to MCLR.  However, it is difficult to speculate about the long-term because there are a lot of factors which are still unknown. The upcoming RBI Rate Cut is one of these factors. We do not know how the Rate Cut will impact the interest rates. So here is our recommendation:

Do NOT switch from Base Rate to MCLR.

(EDIT: The massive drop in SBI’s MCLR by 0.90% is an exception to this. People on Base rate MUST explore switching to the new MCLR. Pls see our post here. Also, you can sign up for a free call with our Home Loan Advisors to get personalised advice.)

At least, not immediately. If you have already taken a loan, then we would recommend that you continue on the Base Rate system for now. Once you switch to MCLR, you cannot revert to Base Rate and it would be wiser to wait and find out how well the new system works. If you decide that MCLR is much better than Base Rate, then you can switch immediately. If you feel that Base Rate is better, then no harm done! You can continue on the Base Rate till the end of your loan. You can stay updated with the developments in MCLR by signing up for our newsletter.

To sum up, the MCLR seems like a positive step taken by the RBI to keep the interest rates in-sync with the market conditions. But keep in mind that we are still at the early stages of this system and there are a lot of updates that will come up in the next few weeks  and you can follow these updates here. As more developments come our way, we will get a clearer idea of how well MCLR is performing in comparison with Base Rate.

Let’s keep our eyes and ears open!

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Comments ( 16 )
  1. Anand
    November 30, 2016 at 12:57 pm
    Reply

    Hi,
    Thanks for the post.. Very helpful!!
    I had few queries:
    My home was sanctioned in December 2013 and my present rate of interest is 9.45%, My wife is co applicant and co owner of the property but we have not got the women concession of 0.05%. Are we elligible for this?
    After the latest RBI cut, do you still feel we should wait before changing from base rate to MCLR? Does SBI charge anything extra for switching from base rate to MCLR?

    • Sumita Nath
      Sumita Nath
      December 1, 2016 at 5:18 pm
      Reply

      Hi Anand,
      Yes your wife is eligible for the concession, you can ask your bank for the same.
      Once you switch to MCLR, you cannot revert to Base Rate and it would be wiser to wait and find out how well the new system works. If you decide that MCLR is much better than Base Rate, then you can switch immediately. SBI Charges 0.57% of your outstanding principal amount for switching from base rate to MCLR.

  2. Rajanandan
    November 27, 2016 at 12:32 am
    Reply

    Hi,

    I have taken home loan in Nov’15 with HDFC Ltd at 9.50% interest p.a. variable. Now that interest rates dropped to 9.15% at HDFC Ltd. However, discovered that this reduced rate is given to new customers and when inquired to reduce interest rate, branch manager asked for conversion fees of Rs. 3000 (after discount, original charges Rs. 5000).

    Does all banks work similarly like collecting fees for reduction of interest rate?

    Also, i got balance transfer offer from Axis bank with 9.20% with zero percent charges. Is it wise to move to Axis bank considering Axis bank follows MCLR and if interest rate reduces in future, will it be implemented by Axis bank immediately and will it pass on existing customers.

    • Sumita Nath
      Sumita Nath
      November 28, 2016 at 3:12 pm
      Reply

      Hi Rajanandan,

      Yes, Bank use to collect fees for reduction of interest rate but due to competition, few banks have started reducing interest rate without any internal fees.
      You can move to Axis bank or any other bank with lesser interest rate which follow mclr rates.
      Yes your interest rate will reduce in future, if rates fall

  3. Kiran Kumar
    September 9, 2016 at 5:39 pm
    Reply

    Currently i have home loan in SBI, Interest calculates w.r.t to base rate and interest rate is 9.45%,
    Is it a wise decision change from base rate to MCLR( Now MCLR interest rate is 9.35% and 10 basis points lower than the base rate)?
    or in near future Base rate may be decrese so shall i remain continue with the base rate?

    • Sumita Nath
      Sumita Nath
      September 15, 2016 at 1:02 pm
      Reply

      Hi Kiran,

      Once you switch to MCLR, you cannot revert to Base Rate and it would be wiser to wait and find out how well the new system works. If you decide that MCLR is much better than Base Rate, then you can switch immediately. If you feel that Base Rate is better, then no harm done! You can continue on the Base Rate till the end of your loan.

  4. Kiran kumar
    August 26, 2016 at 5:23 pm
    Reply

    Currently i have home loan in SBI, Interest calculates w.r.t to base rate and interest rate is 9.45%, Is it a wise decision change from base rate to MCLR( Now MCLR interest rate is 9.35% and 10 basis points lower than the base rate)? or in near future Base rate may be reduce so shall i remain continue with the base rate?

    • Sumita Nath
      Sumita Nath
      September 28, 2016 at 5:26 pm
      Reply

      Hi Kiran,

      I would suggest you to wait and go with base rate as of now. Keep watching mclr trend for few months and then you can decide.

  5. Kiran Kumar
    August 5, 2016 at 12:16 pm
    Reply

    In SBI MCLR is 10 basis points lower than Base rate, Is it better to switch from base rate to MCLR? or In near future Is there any chance base rate is lower than the MCLR?

    • Sumita Nath
      Sumita Nath
      September 29, 2016 at 4:29 pm
      Reply

      Hi Kiran,

      Once you switch to MCLR, you cannot revert to Base Rate and it would be wiser to wait and find out how well the new system works. If you decide that MCLR is much better than Base Rate, then you can switch immediately. If you feel that Base Rate is better, then no harm done! You can continue on the Base Rate till the end of your loan.

  6. surinder tejpal
    June 15, 2016 at 1:50 pm
    Reply

    sir dena bank charge me interst rate at 10.65 now i want to shift on mclr bank manger sir u r rate of interst is 10.55 manger say ur old customer can u help me iam from pathankot

    • Tarini
      Tarini
      June 16, 2016 at 2:08 pm
      Reply

      Hey Surinder Tejpal

      I am sorry but your query seems to be a bit unclear, could you please elaborate? This will help me assist you better.

  7. Kiran
    April 24, 2016 at 10:27 pm
    Reply

    In current trend , which bank is better other than SBI for home loans. Please suggest

    • Soni Singh
      Soni Singh
      April 25, 2016 at 4:00 pm
      Reply

      Hi Kiran

      HDFC and ICICI would be a good option as they are offering same interest rate i.e. 9.45%

    • susheel kumar raina
      May 19, 2016 at 10:32 am
      Reply

      for a common man it is confusing.Can we have a table where a person can put his data and get the result to take decision.

      • Tarini
        Tarini
        June 6, 2016 at 6:56 pm
        Reply

        Hey Susheel

        That’s a great suggestion! Thank you for the input, we’ll have an MCLR calculator up shortly 🙂

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