A lower MCLR ideally means the EMI or the tenure of the loan should see a fall and home loan rates should become cheaper for the borrower.
State Bank of India (SBI), the state-run largest lender, has reduced its Marginal Cost of Funds based Lending Rate (MCLR) by 15 basis points or bps (0.15 percentage point) across all tenors. A lower MCLR ideally means the EMI or the tenure of the loan should see a fall and home loan rates should become cheaper for the borrower.
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However, this impact is not immediate.
There is a reset-period for MCLR based home loans, after which the rates get revised for the borrower. SBI generally offer a rest period of 1 year for MCLR-based loans. For the borrowers, this means that SBI will have to reprice the interest rates on loans after 1 year to pass on any changes in the external benchmark rate.
Borrowers whose reset date comes in May or June 2020 are likely to benefit from the recent announcement by SBI, according to experts.
The reset period is usually mentioned in the loan agreement with the bank
Let's see an example -- if a borrower had availed a home loan from SBI on August 1, 2019, the interest rate will remain unchanged till July 31, 2020 despite any MCLR cut announced by the bank. The benefit of the MCLR reduction will be passed on to the borrow (existing home loan borrower) only on August 1, 2020.
The rate is typically also based on the bank’s own cost of funds. The actual effective home loan interest rate also depends on the loan amount, tenure and other factors.
With the recent announcement, MCLR will come down to 7.25 percent per annum from 7.40 per annum, with effect from May 10, 2020. According to SBI the recent cut will reduce the burden of EMIs on home loan accounts linked to MCLR by Rs 255 for a 30-year loan of Rs 25 lakh.
First Published: IST