Shift from Base rate to MCLR based home loan

Home loan rate for new borrowers after 1st April 2016, linked to 1 year MCLR have come down drastically in the last 1 year. But borrowers who are under the Base Rate (loan taken prior to 1st April 2016) regime having seen their interest rates fall by a significantly lower amount. They will benefit by switching to the MCLR regime.
While most banks charge a percentage of loan outstanding as switching fees, some charge a flat fee in addition to the applicable service tax. As a first step one should translate the flat fee including service tax to a percentage of outstanding loan amount, and compare the difference between MCLR rate and base rate. For example if the fees charged by the bank including service tax is Rs.7500 for an Rs.20 lakhs outstanding loan amount then it works out to 0.375%. Now if the base rate is higher than the MCLR by significantly more than 0.375% it is a straightforward case for a switch. Even if the switching fee is slightly higher than the difference, it still makes sense to switch as the fees is a one-time payment while the benefit from reduced rates will be spread over the entire outstanding loan repayment tenure. It is also possible that the difference may not be thereafter 1 year, so conservatively it is better to calculate with one year in mind only. Currently the difference between MCLR and base rate is anywhere between 100-120 bps for a 1 year MCLR for different banks while difference in home loan rate would be 50-70 bps as home loan rates are a mark up on MCLR.
If your bank is unwilling to reduce your rates or charging high switching fees, you may consider shifting to another lender offering better rates. Generally if customers threaten to shift the loan to another lender, the lender agrees to switch at a nominal fee.

One should note that MCLR & Base Rate are based on different calculations and the gap may decrease in the future. There could be a further drop in base rate in the near future. MCLR would also be more sensitive to rate movements announced by RBI and thus if there is a spurt in short term rates, the MCLR will move up at a faster pace than base rate, just the reverse of what is happening now. Banks generally follow 1 year MCLR for home loans, which means once set (say in May 2017), the MCLR will again be reset after 1 year (in May 2018). Thus even if there is an increase in MCLR after 3-4 months the home loan rate set will not be impacted. Thus as stated above we can safely calculate the difference on the one year difference in rates currently and shift our home loan from base rate to MCLR if calculations work favorably.

For insights on MCLR vs Base Rate refer to my older article. Link: MCLR vs Base Rate for your home loan

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named 'The Tortoise' 

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