If you had taken a home loan before April 1, 2016, chances are that your bank’s credit, loan or relationship manager might have suggested you to switch your home loan from base rate to marginal cost of funds based lending rate or MCLR. But if you haven’t researched much about this topic, you may ask, “Is it worth it or just another sales pitch?”
Before you begin, let’s make it very clear that no bank can force you to switch your loan from base rate to MCLR. It’s your decision. Also, you should properly weigh the pros and cons before switching. Note that this switch is only applicable to those who have taken a home loan before April 1, 2016.
Below, we’ll discuss about the things you should consider before going for a switch. At Finserv MARKETS we try our best to educate our customers and readers to make prudent financial decisions like selecting the right home loan, choosing the right type of loan according to your risk profile, negotiating for best deals, and how to take advantage of attractive home loan interest rates.
In this article, however, we’ll focus on switching your home loan from base rate to MCLR and the things to watch out for before you take the plunge.
Cost of transfer
If you are switching your home loan from base rate to MCLR, ensure that the savings in interest costs justify the cost of the transfer. Banks charge an amount when you transfer from base to MCLR. The cost of the switch could be anywhere between Rs.5,000–20,000.
If you are saving a substantial amount of money while paying your EMIs in the long run by switching to MCLR, of course, you don’t have anything to worry about. However, if you are making the switch because the difference between the base rate and MCLR rate is a few basis points, it’s not worth it.
For instance, if you are paying 8.75% interest on your existing home loan on base rate and the MCLR rate is 8.55%, though it looks like the difference is 20 basis points, once you add the spread to the MCLR it will be equal to or even more than the base rate. In such a case, it is better that you continue with the base rate regime.
Switching or Balance Transfer
You can enjoy the twin benefits of MCLR and refinance at lower interest rates by opting for a home loan balance transfer. After proper calculation, where you calculate the MCLR and spread to arrive at the total home loan interest rate, and if you see that a new lender is providing lower interest rates compared to your existing bank, you can go for a home loan balance transfer. In that case, you will be refinancing as well as moving to the MCLR rate regime automatically.
A Bajaj Finserv home loan balance transfer at Finserv MARKETS offers lower EMIs, customized repayment options, 3 EMI holidays and online account access. There is 100% transparency in all the terms and you have the freedom to choose your own repayment tenure.
MCLR vs. Balance Transfer
In some cases, rather than going for a home loan balance transfer, you may be able to derive the benefits of lower interest rates by just switching to MCLR within the same bank. That way you will save on the costs of transferring the balance to another bank.
Don’t rush in making your decision to switch just because the RBI has reduced the MCLR rate. A bank representative may try to persuade you by using all his/her skills of persuasion but don’t take the final call until you are sure. Think over it and take your time. He/she may have their monthly targets to meet but so do you have financial goals to reach.
A study done by Care Ratings Ltd on RBI’s policy rate changes from October 2011 to August 2018 showed that banks were fast to hike lending rates and slow or reluctant to reduce them. Out of 11 instances of the interest rate reduction by the RBI between 2011-18, banks did not transfer the benefit of reduced interest rates to customers on five occasions. Ironically, banks reduced the deposit rate instead of the base rate on two occasions. It’s better to wait and do some research before you take the decision to switch from base rate to MCLR.
With Finserv MARKETS, availing a Bajaj Finserv home loan is easy, convenient and completely hassle-free. What’s more? The entire process is online and you can enjoy a host of other features and benefits under PMAY scheme, right from the comfort of your home. So why wait? Buy the house of your dreams with Finserv MARKETS, today!
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