Home loan interest rates fall by about 2% in 5 years: Should you switch from MCLR to RLLR?

Home loan interest rates have perhaps reached rock bottom and are at several years low. Existing borrowers are looking to switch from MCLR to repo rate as the rates for new borrowers are much lower than before. Currently, a few leading banks are offering home loans at interest rates of around 6.7 per cent, depending on certain conditions, and for the majority of borrowers, the rate of interest may stand at around 7 per cent. This is still lower than what many borrowers have been paying on loans taken about 5 years back.

A case in point is the Marginal Cost of Funds based Lending Rate (MCLR) in April 2016 which stood at above 9 per cent for most banks. The effective home loan interest rate would have been around 10.5 per cent, taking ‘Mark-Up’ into account. Today, 1-year MCLR stands at around 7 per cent for most banks, a fall of about 2 per cent in 5 years.

However, since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI Repo Rate. It is, therefore, called repo linked lending rate (RLLR). Today, most banks are offering loans based on RLLR which for most banks is around 6.65 per cent or 6.8 per cent.

Effectively, if someone had taken an MCLR linked loan and is servicing EMI at a rate of around 10.5 per cent, should the borrower switch to a loan at the current rate of around 7 per cent? The deal looks tempting as there is a saving of nearly 2.5 per cent on the home loan interest rate.

Even a 100 basis points reduction can help you to save a few lakh in interest cost, depending on the remaining tenure of the loan. Assuming a home loan of Rs 40 lakh for 15 years, the savings in EMI and interest ( On 200 basis points fall) will be:

EMI Saved – Rs 4758 ( Annually Rs 57,000)
Total interest saved – Rs 8.5 lakh

Many home loan borrowers are still paying EMI for their loans linked to the MCLR of the banks. Currently, banks are offering loans based on an external benchmark, which for most banks is the RBI repo rate. It is generally called the RLLR- Repo rate lending rate. As a home loan EMI payer, you can switch from MCLR to RLLR either with the same bank or with another bank. You can get the existing home loan linked to MCLR migrated or converted to RLLR by the bank. So, if you are considering an SBI home loan switch from MCLR to the repo rate, or an ICICI home loan switch from MCLR to the repo rate, or for a loan from any other bank, you can do so.

When to Switch

If your home loan is linked to MCLR and the interest rate is high, you may consider switching especially if the remaining tenure is a few years away. However, remember, that the change in RLLR is much quicker than MCLR, hence if the repo rate goes up, so will be the home loan rate much faster than in MCLR linked loans. “ Borrowers should consider switching for monetary gain after considering the new interest rate which should be 30 bps lower than the existing rate and secondly if the loan has at least 3 years to go before closure,” says V Swaminathan, CEO Andromeda & Apnapaisa, India’s largest loan distributor.

Two ways to switch

There are two ways in which you switch to a lower home loan interest rate. As a home loan EMI payer, you can switch from MCLR to RLLR either with the same bank or with another bank. In other words, you can get the existing home loan linked to MCLR migrated or converted to RLLR by the bank. When you transfer the loan to another bank, it is generally called Balance Transfer or refinancing in home loan parlance.

Refinancing your loan

The process to refinance or balance transfer with another bank may take a few days time. “It’s very simple once you identify a target bank who has a lower rate. One has to apply with the bank, submit KYC, loan statement etc and wait for the sanction letter. After that ask the existing lender for closure amount and hand over closure letter to a new lender who will take the process forward,” informs Swaminathan.

Before you switch to your existing banker or with a new banker, make sure you have checked on the charges. “Watch out for processing fees and other switching costs which might make the transfer unattractive. Also, read the new loan agreement carefully before switching,” says Swaminathan.