 A home is a safe space where you can relax without worry. Today, owning a house is a dream most people have, but applying for a home loan can often be confusing. Especially because of different loan rates and terms, comparing and contrasting takes time.

To make your job easier, in this article we aim to explain everything there is to know about MCLR and base rates so you can make an informed choice.

## What is Base Rate?

The Base Rate was introduced in July 2011. It is the minimum interest rate at which a bank can lend money, with some exceptions dictated by the RBI. It is determined by the given factors:

• Average Cost of Funds: Interest rate provided by bank on deposits.
• Operating Cost: The cost of day to day expenditure of banks.
• Negative Carry in Cash Reserve Ratio: The cost incurred by the banks to keep a specific amount of funds with the RBI.

## What is MCLR?

The Marginal Cost of Fund-based Lending Rate (MCLR) for a home loan is the minimum interest rate a bank must charge for lending. It was introduced by the Central Bank of India and came into effect on April 1, 2016.

Since then, it has functioned as the internal benchmark followed by banks while giving out loans in any category. It replaced the Base Rate system which had been in place since 2010.

The MCLR rate follows tenor-based methodology, meaning it can be changed depending on the period left before the loan repayment becomes due. It is determined by the following factors:

• Marginal Cost of Funds: It is the incremental cost of borrowing more money along with return on net worth. The former has a 92% influence while the latter has 8%. It also includes the repo rate.
• Negative Carry on Account of CRR: The Cash Reserve Ratio is the minimum amount of cash reserve that a bank must maintain in the Reserve Bank of India (RBI) at all times. This cash deposit has to be taken under consideration while determining the home loan interest rate.
• Operations Cost: This involves the operational costs of the bank’s daily activities.
• Tenor Premium: It is the premium charged based on the period of the loan.

Essentially, the MCLR offers a floating interest rate, subject to fluctuation if there are changes in the Repo rate. Generally, MCLR interest on home loans is lower than the Base Rate.

The key difference between the two is that the Base Rate on loans is determined by the average cost of funds while MCLR is determined by the current cost of funds.