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In case of a home loan, various factors affect the home loan interest rate, and consequently, the home loan EMI. The Marginal Cost of Funds Based Lending Rate (MCLR) and reset period are two such important aspects determining the monthly instalments of your housing loan. Read further to know more.
What Is MCLR and How Does it Affect Your Home Loan EMI?
- MCLR or The Marginal Cost of Funds Based Lending Rate (MCLR) is the minimum rate of interest below which lenders cannot offer home loans to the borrowers. This MCLR methodology for determining the interest rates on loans was introduced by Reserve Bank of India (RBI) with effect from April 1, 2016.
- All home loans are linked to MCLR. Thus, a lower MCLR would translate to lower home loan interest rate. This, in turn, will reduce the EMI as well as the repayment burden significantly. A reduction in MCLR rate will certainly benefit all borrowers.
- Most of the loan borrowers feel that the MCLR rate cut would lead to a reduction of interest rates instantly. However, this is not true. To enjoy the benefits of the MCLR cut, home loan borrowers are expected to wait until the reset period of the bank is over. The reset period may vary from one bank to another.
Reset Period and its Impact on Home Loan EMI
The reset period is closely related to MCLR. Home loan borrowers cannot transfer their loan to MCLR unless the reset period of the bank is over. Most banks link their loans to 6 months MCLR or 12 months MCLR. If the borrower avails a housing loan based on 12 months MCLR, the interest rate can be reset only after 12 months. Once the interest rate is reset, the home loan EMI also changes accordingly.
Housing loans are big-ticket loans that run for a long time. Because of the long tenure of a home loan, even a slight difference in the interest rates can affect the home loan EMIs significantly. To have a better estimate of your monthly EMI outgo and total interest payable, you can make use of an EMI calculator. You can plan your finances in a better way and make timely repayment of your housing loan if you have an estimate of your home loan EMI.
Apart from MCLR and reset rate, the tenure of your loan plays a vital role in determining your EMIs. The longer the tenure, the lower will be your monthly instalment. Whereas, if you opt for a short-term home loan, your EMI will be higher. However, by paying higher EMIs, and clearing your loan sooner, you can bring down the overall cost of borrowing and save on the total interest outgo of the loan. Thus, you must evaluate your repayment capacity carefully and settle for a loan tenure that suits you the best.
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