You might be well aware that the floating rate of interest on home loans keeps changing throughout the tenure. Even a small change in the economic or socio-political conditions of the country is likely to bring a change in the interest rate of home loans.
However, external factors like inflation or social unrest do not directly affect the interest rate. The benchmark rate, on which the floating interest rate is based, is mostly affected. Base rate and MCLR are the two internal benchmark rates that were used by financial institutions to set the home loan interest rates.
To get a clear picture of your home loan interest rate, it is essential to understand the difference between the two. Go through further details below.
What Is Base Rate?
Base rate is a minimum rate at which lenders lend money to the borrowers. It is calculated based on factors like unallocated overhead costs, negative CRR, the margin of profit and an average return on net worth. As it includes the profit margin of the bank, there are often delays in passing down the benefit of reduction in RBI rates to the borrowers. To pass down the benefit of lower interest rate when policy rate reduces, RBI keeps changing the benchmark rates. Therefore, in 2016, base rate was replaced by MCLR by the Central Bank of India.
What Is MCLR?
MCLR stands for marginal credit lending rate. It was introduced in 2016 by Reserve Bank of India to bring transparency in the benchmark rate. MCLR is the minimum interest rate at which the banks lend you money. Unless permitted by RBI, banks cannot lend money below this rate. It is the internal benchmark rate that the lender refers to while deciding the floating rates of home loan for a customer. MCLR is reset periodically, be it quarterly, half-yearly or annually. So if your home loan were set on MCLR, your rate of interest rate would be reset as and when the MCLR is reset. MCLR is based on four factors: operating cost, tenure premium, cost of maintaining CRR and marginal cost of funds.
Difference between MCLR and Base Rate
| MCLR | Base Rate |
| Ensures more transparency | Lacked transparency for the customer
|
| Calculated considering repo rate | Calculated considering the profit margin
|
| Includes tenure premium
|
It can be affected by different home loan tenure |
| MCLR is calculated considering cash of maintaining CRR, operating cost, repo rates and deposit rates | Base rate is based on factors like unallocated overhead costs, negative CRR, the margin of profit and an average return on net worth |
| It is based on the incremental cost of funds | It is based on the average cost of funds
|
| Customers are benefited more from this as it is based on repo rate | It was hardly affected by monetary policy |
Both base rate and MCLR are internal benchmark rates on which the home loan interest rates are based. However, since 2019, these internal benchmark rates have been replaced by external benchmark rates and customers have the option to switch to the new regimen.
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