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If you’re getting a home, you’re probably considering going with a lender offering a lower home loan rate. After all, a lower home loan rate typically translates to lower EMIs, ergo easier loan repayments. Besides, it helps you save on the total amount you spend on interest on these long-term loans too!
But here’s the thing. Selecting a home loan scheme based on interest rates gets complex pretty quickly. The reason? Lenders typically will offer you two types of loans: MCLR-based home loans or RRLR-based home loans.
But what is RLLR rate and MCLR in the first place, and how do they differ from one another? More importantly, how do you make the right choice? Continue reading to find out!
In this article we will explain MCLR meaning, RLLR meaning, and discuss how both these rates affect your home loan journey.
In simple terms, the MCLR, or the Marginal Cost of Funds Based Lending Rate, is the lowest interest rate a lender can offer. It typically considers factors like your loan tenure, the repo rate (the rate at which commercial banks borrow money from RBI), Marginal Cost of Fund, Cash Reserve Ratio, Tenor Premium, Operating Costs, etc.
This means, if you opt for an MCLR-based home loan on a floating interest rate, the loan interest will change depending on the prevailing repo rate and other factors. What’s more, these changes come into effect after a specific term called a reset period, ranging from 6 months to a year.
So, why should you opt for MCLR interest rate as a borrower? Well, the MCLR rate is lower than the base rate of interest offered by most lenders, given the considered repo rates while calculating the marginal cost of funds. So, they are a great choice if you’re looking to lower your home loan interest.
RLLR or Repo Linked Loan Rate is by definition, a lending rate that depends on the repo rate. That said, a few other factors that influence the RLLR include the loan to value ratio, the risk of the borrower, and more. Put simply, if the repo rate increases the RLLR increases and vice versa. Additionally, the RRLR changes immediately as and when the repo rate changes.
MCLR has internal linking, which means the lenders decide after considering their own costs. The repo rate is not the primary determinant of this type of rate.
Repo linked lending rate has external linking, which means with every change in repo rate, the interest rate changes immediately. Lenders or financial institutions only have the freedom to choose their markups, but the repo linked lending rates only get influenced by the repo rate.
Lenders typically revise their MCLR rates in 6-12 months. This means even if the repo-rate changes, you can benefit from it only after the 6-12 month term.
In the case of repo linked lending rate loans, the interest rates get revised every 3 months, and it will also influence your EMIs.
MCLR interest rates have a longer waiting period, meaning they change slowly. This gives you, the borrower, enough time to adjust to interest rate changes and secure the necessary financing.
In contrast, repo linked lending rates change quickly. This means interest rate changes immediately reflect on your loan EMIs.
Choosing between the two types of interests will be based on a number of personal elements that you will have to assess, examine, and reach a conclusion. You may, however, be able to decide which is better based on some comparisons between them.
The MCLR rate and its computation are a lender’s internal business. This means you might find it difficult to understand the exact reasons for a particular interest rate. In contrast, repo linked lending rate is available publicly to everyone. Naturally, they are the better choice if you care about interest rate transparency.
In terms of stability, MCLR loan rates are a better option. Why? Because repo linked interest rates change with every shift in the repo rate, making it inconvenient for borrowers like you to arrange for finances in case of a rate increase. MCLR loan rates, on the other hand, shift slowly. Hence, you have a longer period to arrange for finances in the rare case that interest rates shoot up dramatically.
Since home loans have long tenures, it’s suitable to get a loan at a low interest rate to get maximum savings. And you can do this best by opting for a repo linked interest rate. When you choose a repo rate linked home loan interest rate, your interest rate decreases drastically as the repo rate falls. This means you get to pay smaller EMIs.
In contrast, a dip in repo rates may not affect your MCLR rate-dependent home loans at all. Naturally, repo linked loan lending rates are the obvious choice if you want to save on loan interest.
The table below offers a quick comparison of MCLR and RLLR:
|Feature||MCLR||RLLR||Key takeaway for the borrower|
|Benchmark linking||Internal linking, lenders decide the rate.||Depends on the current repo rate.||RLLR offers more transparency.|
|Reset period||Revised every 6-12 months||Revised every 3 months||If repo rates fall, your EMIs will become smaller and you may be able to save more on interest payments in the case of RLLR.|
|Transmission rate||Take a long time to change||Change quickly||MCLR-dependent loan schemes are more stable.|
By this time, you know MCLR full form, RLLR full form, how they work, and how they impact you. Now, you have all the information, and you need to make a choice. But if you’re still over the edge, speak with your lender about both options. Oftentimes, you might find MCLR loan rates and repo linked lending rates stack up differently depending on your lender and whether you are a first-time or a recurrent borrower.
If you’re looking for a lending partner to get your housing loan, look no further. We, at Tata Capital, provide both types of house loans. And the best part? Our home loans start at a competitive interest rate of 6.85%. Visit our website to learn more.
Policies, Codes & Other Documents