What is MCLR and how is it calculated?

Marginal Cost of Funds Based Lending Rate

When it comes to borrowing via options like a home loan, where repayment usually last a decade or two, the interest rate is among the most important elements to take note of and understand. This is because it dictates the overall cost of the loan and so, it is in your best interest to find offerings that operate using the most beneficial guidelines for borrowing. For instance, lenders offering floating rate home loans under the MCLR regime are particularly beneficial as these can be financially viable and cost-effective because of the role of this internal benchmark.

Right from timely action on repo rate changes to nominal interest rates on loans under the prevailing MCLR, this benchmark has proven to be beneficial. Read on to better understand what MCLR is and how it is calculated.

What is MCLR?

Before understanding MCLR’s meaning in its entirety, you should first know MCLR’s full form. MCLR is an abbreviation for ‘Marginal Cost of Funds Based Lending Rate’. It is an internal benchmarking lenders use to decide upon the interest rate offered on loans and was introduced in 2016 to replace the existing base rate system in place. As a rule, lenders cannot offer loans lower than the prescribed MCLR rate and this is decided upon based on factors such as the repo rate and the cost of funds. However, in special cases, lenders can go below the MCLR rate, if they’ve acquired prior permission from the RBI.

What are MCLR mark-ups?

Simply put, MCLR mark-ups are the additional costs added to the MCLR by the lender. The interest rate on your home loan can be either the prevailing MCLR or one with an added spread. For example, if you’re applying for a home loan with a sub-par credit score and a history that shows a series of default, the lender may then add a 0.25% spread or higher to the MCLR as your profile carries some risk. Alternatively, some lenders may also completely waive off the mark-up and approve your loan application at the MCLR.

So, as a rule, scout for viable loan options based on the interest rate, as it will include the spread, rather than the lowest MCLR as that may not be available to your profile.

How is MCLR calculated?

In order to accurately calculate MCLR, your lender considers 4 main factors. These are the operating costs, tenor premium, negative carry on the CRR and the marginal cost of funds. All of these are decided based on very precise parameters and the final MCLR is only published after careful consideration. For example, in order to decide on the tenor premium, lenders consider the duration of the loan. As longer loans carry a greater risk, lenders charge higher premiums to you, the borrower. This is also the case with the other factors and based on the values, the following RBI-prescribed formula is used.

MCLR = Marginal borrowing cost*92% + return on the net worth*8%

When can you expect to see a change in interest rate for your MCLR-linked home loan?

As the MCLR is linked to the repo rate, any changes made by RBI to it have a direct impact. Based on the new repo rate, lenders will then publish a revised MCLR for their offerings and make it applicable to floating-rate loans. However, in order for you to see change in your floating-rate home loan, you will have to wait until your loan-reset date and only then will the lender re-price the loan, based on the current MCLR. You should also note that loan resets for MCLR-linked options happen periodically and can be anywhere between 6 months to 1 year.

While the MCLR benchmark ensures that you get the most updated interest rates available on your home, cost-effective borrowing starts with picking the right lender. To that end, the Bajaj Housing Finance Limited Home Loan is an excellent option to consider as it grants access to a massive sanction at competitive interest rate.

With this offering, you get up to Rs.3.5 crore as a sanction to help you comfortably fulfil your home purchase needs. What’s more, you can avail an interest subsidy of up to 6.5% under the PMAY scheme and also get access to other value-added loan features. These include property search services such as expert counselling to help you identify prime properties within your budget and professional assistance with all the legalities that follow.

Now that you have a better understanding of MCLR and this cost-effective loan, choose your loan carefully.