What Role Does MCLR Play In Your Home Loan? - Loan Trivia

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Tuesday, 28 August 2018

What Role Does MCLR Play In Your Home Loan?


MCLR or Marginal Cost of Funds-based Lending Rate is set by the Reserve Bank of India as its new benchmark. It depends on factors like the marginal cost of funds, lender’s operational expenses, cash reserve ratio, and tenor premium, a charge applied on loans of longer tenure. Here’s all you need to know about MCLR based home loans

If it talks about MCLR, then there are 3 important things to be noted about. Let’s have a look on these points-

  • It is based on the marginal or incremental cost of funds as compared to base rate which is based on the average cost of funds.
  • It is calculated by considering tenure payment. While the base rate is calculated by taking into consideration the minimum rate of return/ profit margin.
  • MCLR is determined by considering deposit rates and repo rates along with operating costs and the cost of maintaining cash reserve ratio. While the base rate is governed by operating expenses and ones needed to maintain cash reserve ratio. Also read, How Home Loans Became Affordable.


Introduction of MCLR has proved beneficial to home loan borrowers, as mentioned below.

  • Lenders have slashed their base rate to keep up with the competitive markets. Thus, creating a more appealing market for potential home loan buyers.
  • Borrowers who got the loan on or before 1st April 2016 are enjoying reduced rates by switching to MCLR from the base rate.


It is fairly simple for home loan buyers who took the loan on a base rate to switch to MCLR. Take time to research the cost of transfer and actual benefits well in advance before applying for the process. You must even take into consideration the amount that is saved as a result of this switch. 

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