Is it the perfect time to switch home loan interest rate from base rate to MCLR?

If you are an existing home loan borrower, and expecting a reduction in interest rates in line with the recent Reserve Bank of India (RBI) repo rate cut, you could be disappointed. People who had taken loans after July 1, 2010, but before April 1, 2016, the loans are linked to the lending bank’s base rate. Besides that for most of these borrowers, the home loan interest rate is upwards of 10 per cent.

Under the base rate regime, all the banks were either reluctant to cut their lending rates (after RBI repo rate cuts) or they did so with a time lag. Now an interestingly new method of bank lending was put in place for all loans, including home loans, given after April 1, 2016. It is known as the marginal cost of funds based lending rate (MCLR)

Does it leave pre-April 1 base rate borrowers stranded? No, as now you have two options, either switch to MCLR with the same bank or transfer (refinance from) to another bank on MCLR. You can also continue the loan on base rate, especially if the maturity period is near. Banks, on their own, hardly reduce the tenure automatically and transfer the benefit of a lower rate to the customers. Getamber Anand, President, CREDAI National, says, “Those who have loans on which MCLR is not applicable should consider opting for MCLR as the present trend indicates that the rates will either hold or go down again. This would play in their favour and allow room to manoeuvre in terms of personal and investment finance.”

It has made clear by the RBI also that banks should allow base rate borrowers to switch to MCLR. The existing loans will run till maturity or the borrowers can switch to MCLR on mutually agreed terms. Furthermore, the RBI has made it clear that the bank cannot charge a fee for it nor treat it as a foreclosure.