How MCLR and Repo Rate affects your home loan interest rate?

The Monetary Policy Committee of the RBI recently raised the repo rate to 6.50% from the existing 6.25%. Repo rate is the rate in which the central banks lend Cash to all banks. The main reasons behind the rate hike are inflation and rising oil prices. Now, let’s take a deeper look at what the repo rate hike means for the borrowers and investors.

Impact of a rate hike on home loans:

A hike in repo rate will have a direct impact on the borrowers as banks are likely to increase home loan interest rates. This is because a hike in repo rate means that bank’s marginal cost based lending rate (MCLR) in all likelihood will go up. MCLR refers to the minimum rate of interest of a bank below which it cannot lend, except in some cases allowed by the RBI.

As per the central bank’s guidelines, all loans including home loans disbursed on or after April 1, 2016, should be linked to MCLR. Banks are free to decide whether to charge additional markup over and above MCLR or not. However, the lending rate could not be below the MCLR.

Home loans are usually offered at floating rates which means it changes along with the interest rates in the country. The amount of loan taken by you is also much higher as compared to a personal loan or car loan. So, any increase in home loan interest rates will mean more interest payments for you on home loans.

Let’s take an example: Suppose you have taken a home loan of Rs. 60 lakhs for 20 years at 8.25%. Then your total EMI will come out to Rs. 51,124. Your total interest outgo will be Rs. 62.69 lakhs. If the interest rate increases by 0.25%, your EMI will increase to Rs. 52,069 and the total interest payout would be Rs. 64.96 lakhs. This means you will be paying Rs. 2.27 lakhs more. If the interest goes up by 0.50%, then you will be paying a total interest of Rs. 67.25 lakhs which mean an additional payment of Rs. 4.66 lakhs.

What should a borrower do?

If you are still thinking to take a home loan, you shouldn’t wait any longer as banks have started increasing the interest rates. Your EMIs for the future period will be calculated on the basis of the MCLR effective on that date for the bank. In the case of an existing borrower, if your home loan is an MCLR-linked one, the EMI burden is likely to increase as banks have been hiking interest rates. However, this hike in EMI will be applicable to you when the reset date of your home loan arrives. On the reset date, your future EMIs will be calculated on the basis of the MCLR applicable on that date.

If there is an increase in home loan rates after the reset dates, existing borrowers should first compare the home loan rates offered by other lenders and should consider a balance transfer if there are substantial savings on interest payments. But if you are near the end of your loan, it is wise to maintain the loan till the end of its tenure to collect any useful tax deductions.

You can also consider pre-paying a part of your loan repayment amount. If you have any surplus savings, use it for prepayment of your loan. Pre-payment of your loan will reduce your interest outgo. This is applicable to both new or existing borrowers.

Conclusion: RBI had recently raised the repo rate to 6.50% from the existing 6.25%. Repo rate in which the central bank lends Cash to all banks. Now, let’s take a deeper look at what the repo rate hike means for the borrowers and investors. If there is a hike in repo rate it will have a direct impact on the borrowers as banks are likely to increase interest rates on loans. This happens because a hike in repo rate means that bank’s marginal cost based lending rate (MCLR) in all likelihood will go up. MCLR refers to the minimum rate of interest of a bank below which it cannot lend, except in some cases allowed by the RBI. As per the central bank’s guidelines, all loans including home loans disbursed on or after April 1, 2016, should be linked to MCLR. The lending rate offered by banks could not be below the MCLR. Home loans are usually offered at floating rates which means it changes along with the interest rates in the country. The amount of loan taken by you is also much higher as compared to a personal loan or car loan. So, any increase in home loan interest rates will mean more interest payments for you on home loans. If you are planning to take a loan, don’t wait for long as banks have already started increasing the interest rates. Your EMIs will be calculated on the basis of the MCLR effective on that date for the bank. In the case of an existing borrower, if your home loan is an MCLR-linked one, the EMI burden is likely to increase as banks have been hiking interest rates. However, this hike in EMI will be applicable to you when the reset date of your home loan arrives. So, as a borrower, you should keep the effects of MCLR and repo rate in mind to make an informed decision and save more on interest payments.

Additional Reading: What are the different types of home loans?

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