Did You Take Your Home Loan Before April 2016? It May Get Cheaper Soon

Did You Take Your Home Loan Before April 2016? It May Get Cheaper Soon

Did You Take Your Home Loan Before April 2016? It May Get Cheaper Soon
(Dreamstime)

If you bought your home before April 2016 with the help of a home loan, here is good news for you. In a directive issued on February 8, the Reserve Bank of India (RBI) has asked financial institutions to link the old home loans with the marginal cost of funds-based lending rates.

It was on April 1, 2016, that the new lending benchmark was launched by the Reserve Bank. Prior to that, home loans were linked with the base rate since 2010. Under the MCLR regime, rates are calculated after factoring in banks' marginal cost of funds, return on equity and negative carry on account of cash reserve ratio, and so they are more sensitive to policy changes implemented by the RBI from time to time, unlike the previous base rate regime. In 2016, the base rate was 11 at its peak which is now down to 8.34 per cent. 

As and when banks decide to follow the diktat by the Governor Urjit Patel-led central bank, old home loans would become cheaper. Rates under the previous regime were often arbitrarily decided by banks, and reflected little changes brought by the RBI, severely affecting the finances of borrowers.

"With the introduction of the MCLR system, it was expected that the existing base rate-linked credit exposures shall also migrate to the MCLR system," the RBI said in the statement on Developmental and Regulatory Policies on February 7.

Even today, a large proportion of bank loans continues to be linked to the base rate despite the RBI insisting banks linked old loans to the new lending benchmark.

"Since the MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018," the RBI said.

Under the base rate and BPLR, banks were following individual methodologies for computing the minimum rate at which they could lend.

In its sixth monetary policy review on that day, the RBI left repo rate ─ the rate at which the central banks lends to scheduled banks in the country ─ unchanged on concerns of inflation and rise in international oil prices.

In its sixth monetary policy review on that day, the RBI left repo rate ─ the rate at which the central banks lends to scheduled banks in the country ─ unchanged on concerns of inflation and rise in international oil prices.

After the Monetary Policy Committee Meet on February 7, RBI Deputy Governor NS Vishwanathan said, "We are now harmonising the calculation of base rate with the MCLR so that the responsiveness of the credit portfolio to monetary policy signals is not hindered by interest rate on large part of bank portfolio being linked to base rate.”

With inputs from Housing News

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