Good news for all the home buyers who took loan before April 2016! In a recent announcement about its monetary policy, RBI has decided to keep key interest rates at hold. It means the home loan rates of the Pre-April 2016 borrowers will get cheaper in line with the new policy.
Those who have availed home loans before April 2016 will now get the benefit of the lower marginal cost of lending rate as RBI has mandated all the banks to use the new benchmark even for older loans.
Prior to April 2016, home loans were linked to the base rate which was randomly decided by banks. Many people complained that the base rate was not reflecting rate cuts due to which RBI has introduced the formula-based marginal cost of lending rate (MCLR) which was linked to the cost of funds. While borrowers after April 2016 got the benefit of MCLR, those with older loans continued to pay as per the base rate.
In a press release RBI said, “Since 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.”
MCLR was first introduced by Former RBI governor Raghuram Rajan to calculate the benchmark lending rate in another attempt to make banks pass on policy rate cut benefits to borrowers quickly and in a more transparent manner. Further it is calculated after factoring in banks’ marginal cost of funds (largely, the interest at which they borrow money), return on equity (a measure of banks’ profitability), and negative carry on account of cash reserve ratio.
It is also informed in the press release that the RBI will issue more instructions in this issue by the end of next week.