It’s very important to have your own home. It gives a double benefit. A roof over your head and the value of the house appreciates with time. Many young people avail a home loan to buy their dream home. Home loan interest rates are falling in recent times and this might be the right time to buy that dream home.
So why have home loan interest rates fallen? One of the reasons is demonetization. After demonetization, banks were flush with cash as citizens deposited old 500 and 1,000 rupee notes. Banks cut down interest offered on SB accounts and FDs. Most banks offer interest of 3.5% on SB accounts. FD Rates are around 6.5-7% a year.
Another important reason for home loan interest rates falling is the MCLR? What is MCLR? Let’s find out. Want to know more on home loans? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
Before I tell you what’s MCLR or Marginal Cost-based lending rate, let’s first understand what base rate is. Base rate is the lowest rate banks charge customers who avail loans. No bank could offer an interest rate lower than base rate.
After April 1st 2016, banks shifted from base rate to MCLR. MCLR is lower than base rate and this means cheap home loans. MCLR is associated with floating rate loans. In floating rate loans, interest rates change with market conditions.
SEE ALSO: Tips For Home Loan EMI Repayment
To calculate MCLR you need to understand marginal cost of funds, tenor premium, operating expenses and cost of maintaining cash reserve ratio (CRR).
Find this difficult to understand? I’ll explain. Your bank wants to make an investment and the cost of investment is Rs 2,000. Due to some reason, the banks expenses on this investment have increased to Rs 3000. The additional cost (Rs 1,000) is the marginal cost of funds.
MCLR is quite close to the interest, banks pay on FD deposits. This makes MCLR much lower than base rates.
SEE ALSO: Tips to apply for a home loan after 45
On a floating rate home loan, banks have a 6-month or a 1-year MCLR as a benchmark. If you choose the 1-year MCLR, banks will reset home loan rates, every one year. Let’s say you have taken Rs 50 Lakh home loan from a bank at 6-month MCLR of 9.5%, on April 1st 2017. This loan has a spread of 0.5%.
Your home loan will be 10% (9.5% + 0.5%). You have to pay your home loan installments at this rate for 6 months. On October 1st 2017, your bank revised the 6-month MCLR to 9.3%. The spread remains constant at 0.5%. The home loan interest gets automatically reset to the revised interest rate of 9.8%.
MCLR is a very good option if interest rates are going down. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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