Home loan borrowers – are customers really enjoying the rate cut benefits?

Home loan borrowers – are customers really enjoying the rate cut benefits?

Having a home to call your own is an individual’s dream. Investing in real estate offers numerous benefits – while ensuring that you find a home for your family, it also serves as a good investment option. The rapidly falling interest rates makes taking bank loans as an ideal solution for individuals to finally make the dream of owning a home a reality.

Here, it’s important to understand the introduction of the Marginal Cost of  Funds based Lending Rates (MCLR) system with effect from April 1, 2016, by the Reserve Bank of India (RBI). Under the MCLR, RBI asked all banks to follow the marginal cost of funds method to arrive at their benchmark-lending rate. In MCLR, actual loan pricing will be based on this benchmark depending on the credit standing of the customer and the existing relationship with the bank.

In contrast, home loans taken before April 1, 2016, were based on RPLR (Retail Prime Lending Rate), which was arbitrarily decided by banks. It is the benchmark on which the banks price their loans to customers and is based on the average cost of funds of the bank. The problem with the RPLR is that it is not very flexible and hence does not move with the shifts in the RBI repo rates. This largely defeats the entire purpose of RBI rate cuts since these rate cuts do not get transmitted to the end borrower. For home loan borrowers who have taken loans before 2016, it’s important to move to the MCLR system to truly benefit from the falling interest rates. Two
steps that customers need to ensure to move their loans to the MCLR system include:

1. Write a letter to the bank informing them about the desire to move to the MCLR system.

2. Incase, the banks are persistent for the customers to continue with the older system, customers can switch their loans from their existing bank lender
to another bank for a loan takeover option.

Idea & Concept: Noufal Latheef, Chartered Wealth Manager/ Research Analyst / Faculty
Content Development: Anju Kurian


    Your Name:

    Your Email :

    Your Mobile No :