As an existing home loan borrower, if you are expecting a reduction in interest rates in line with the recent Reserve Bank of India (RBI) repo rate cut, you could be disappointed. For those who had taken loans after July 1, 2010, but before April 1, 2016, the loans are linked to the lending bank's base rate. And for most of these borrowers, the home loan interest rate is upwards of 10 per cent.
Under the base rate regime, the banks were either reluctant to cut their lending rates (post RBI repo rate cuts) or did so with a time lag. A new method of bank lending called marginal cost of funds based lending rate (MCLR) was put in place for all loans, including home loans, given after April 1, 2016.
So does that leave pre-April 1 base rate borrowers stranded? No, because now you have two options, either switch to MCLR with the same bank or else transfer (refinance from) to another bank on MCLR. One may also continue the loan on base rate, especially if the maturity period is near. Banks, on their own, typically reduce the tenure automatically and, thus, transfer the benefit of lower rate to the customers.
The RBI has made it clear that banks should allow base rate borrowers to switch to MCLR. The existing loans can run till maturity or borrowers can switch to MCLR on mutually agreed terms, but the RBI has made it clear that the bank cannot either charge a fee for it or treat it as a foreclosure.
Switching from base rate to MCLR within the same bank
It makes sense to switch if the difference between what you are paying and what the bank is offering now as MCLR is significant. And also in cases where the time for the home loan to finish is not near.
Switching loan from base rate to MCLR with another bank (refinancing)
If your bank is offering a high home loan interest rate (MCLR plus spread) then look for refinancing. Gets the loan refinanced from a bank offering a low interest rate of around 9.5 per cent. "However, before you refinance your loan, compare and look around for offers and shortlist the most suitable ones. Through emi calculator Make sure you consider all associated charges such as the transfer fees, legal charges, etc.
MCLR is more dynamic
The primary reason to switch from base rate to MCLR has to be the sluggishness seen in banks' passing on the benefits of RBI rate cuts to borrowers. The MCLR uses marginal cost of funds, which include the interest rate at which the bank issues deposits, the cost of borrowings or the repo rate, as well as the returns on net worth. This means that each time the repo rate changes, the MCLR rate will change. Unlike this system, the base rate does not account for the repo rate. Hence, the changes to the repo rate may take an indefinite amount of time to reflect in the lending rates.
[Source: http://economictimes.indiatimes.com/wealth/borrow/is-it-the-right-time-to-switch-home-loan-interest-rate-from-base-rate-to-mclr/articleshow/54970857.cms]