The home loan market has been abuzz with activity over the past two years. For one thing, lending rates have fallen sharply, bringing cheer to borrowers. More important, starting April 2016, the lending rate on your floating rate home loan is being pegged against a new rate — the marginal cost of funds-based lending rate (MCLR), which replaced the erstwhile base rate. This has led to a differentiation among two set of borrowers — those under MCLR mechanism and those under the base rate regime. Consequently, movements in interest rates have meant different things to different borrowers over the past two years.

With a few banks now gradually increasing their benchmark lending rate, the MCLR, we survey the landscape to offer you strategies for what you should do to make the best of the home loan deals available in the market.

Different strokes

First, it helps to understand why rate movements have impacted various borrowers differently. Under the new norms, banks add a spread to the MCLR (instead of the base rate) to arrive at the loan rate. So, from a borrower’s perspective, nothing much has changed insofar as the final loan rate is concerned. But given that the MCLR is computed on the basis of the latest rates offered on deposits, which have come down in the past couple of years, the MCLR has fallen more sharply over these two years than it would have under the erstwhile base rate system.

But not all borrowers benefited from this.

For one, existing borrowers under the erstwhile base rate, who took loans prior to April 2016, continue to be charged interest pegged to the base rate. While banks have cut MCLR sharply, they have only tinkered with base rate over the past year. Hence, there is still a wide gap of 80-90 bps between the MCLR and the base rate; sadly, old borrowers have not derived much of a benefit.

Second, even for borrowers who have taken loans under the new MCLR structure, there are differences in the way any movement in the banks’ benchmark rates impact them. This is because unlike under the base rate system, where a revision in base rate was immediately reflected in the lending rates of all loans benchmarked against it, lending rates under the MCLR regime are reset only at intervals corresponding to the tenure of the MCLR. In the case of home loans, for instance, since the loans are benchmarked against the one-year MCLR, lending rates will only be reset every year; month-on-month changes in the MCLR will not matter.

Hence lending rate movements impact a new borrower, an old borrower under MCLR and existing borrowers under base rate differently.

Between January 2015 and December 2017, lending rates on fresh loans fell by a tidy 2 percentage points. But a few banks have been slowly increasing the lending rates over the past month.

For instance, Dena Bank and Kotak Mahindra Bank increased their one-year MCLR by 5 bps recently. Axis Bank has increased its MCLR by 15 bps over the past two months. HDFC Bank has increased its MCLR by 10 bps. IndusInd Bank’s one-year MCLR has gone up by a notable 25 bps from 8.85 per cent in December 2017 to 9.1 per cent in February 2018.

Lock into low rates

New borrowers looking to take fresh loans should shop for the best rates. With rate increases likely to pick up pace, locking into cheapest rates now will cushion you from an increase in EMIs. For loans up to ₹75 lakh, Indian Bank’s offer of 8.25 per cent on home loans appears to be the cheapest for now. Allahabad Bank, Bank of India, Union Bank of India and Central Bank of India charge 8.3 per cent on home loans. Dena Bank and SBI charge 8.35 per cent.

For old borrowers under the base rate system, not switching to the MCLR-based lending rates has cost you dear in the past year. And perhaps now is not the time to make the switch. This is because the RBI has decided to link the base rate with the MCLR effective April 1, 2018. Once the contours of the link are established, you could try to switch to cheaper loans if you are still paying a hefty interest on your loans.

Existing borrowers under the MCLR regime may find that there are other banks that charge at least 30-50 bps less. You could consider switching after working out the math on the savings vs the cost of making the move. Borrowers under MCLR should note that lending rates are reset only at intervals corresponding to the tenure of the MCLR. So, your precise lending rate will depend on when you took the loan the previous year.