Decoding MCLR: Should you switch from Base Rate to MCLR?

MCLR

Reserve Bank of India has directed all scheduled commercial banks to shift to MCLR (Marginal Cost of Funds based Lending Rate). This means all new loans sanctioned on or after April 1, 2016 will be linked to MCLR.

MCLR stands for marginal cost-based lending rate. Earlier, your loans were priced at a spread over the Base Rate. For instance, if the base rate was 9.5% p.a. and the spread was 50 bps for your risk profile and loan tenor, you will have to pay 10% p.a. on your loan.  From April 1, 2016 MCLR will replace Base Rate. All the new loans will be offered at MCLR + Spread.

What is MCLR? What is the need to shift to MCLR? How is MCLR calculated? How does it affect you? These are some of the questions I would try to answer in this post.

Why MCLR (Marginal Cost of Funds based Lending Rate)?

You have been hearing about RBI has cut interest rates many times over the last two years. However, your home loan EMI has not gone down that quickly. Banks have been reluctant to pass on these rate cuts (in form of lower interest rates) to borrowers like you. Why?

Banks have been giving one excuse or the other for not reducing lending rates. Before MCLR, lending rate was linked to the Base Rate. There was just one base rate for all the loans.  You were given loan at Base Rate + Spread. This Spread was constant during the term of the loan (could be changed only in case of default or breach of terms of the loan agreement).  If the bank reduced Base Rate, interest rate on both new loans and old loans will go down.

In case of rate cuts by the Reserve Bank, banks could always say that even though the cost of fresh borrowing has gone down, they have legacy deposits for which the interest rate remains high.

There was nothing beyond a point that RBI could do to ensure quick transmission of interest rate cuts.

To counter this, RBI has introduced MCLR so that banks link their lending rates to marginal funding costs (cost of fresh or incremental borrowings).

With MCLR, the RBI wants to ensure that the lending costs are in line with the cost of fresh (incremental) borrowing. Hence, if the bank cuts the rates on deposits, it will automatically have to transmit the cut in deposit rates to lending rates. By cutting the deposit rates, the bank brings down its marginal cost of funds because it can raise deposits at a lower interest rate.

So, the rationale is simple. If you can borrow at lower rates, lend at lower rates.

How is MCLR calculated?

You can expect MCLR to be linked to fresh (incremental) cost of borrowing. However, there is more to it. Borrowing is not just rates of fixed deposits. It includes current account balances, savings account balances, wholesale borrowings, borrowings from RBI.

But there is more to it. Let’s look at various components of MCLR.

  1. Marginal Cost of Funds: This is cost of fresh (incremental) borrowing to the bank. It takes into account interest rates of different types of deposits (current, savings, term deposits etc). Marginal cost of funds is not just the deposits (borrowings) that the bank has accepted. There is some equity too. Hence, cost of equity is also considered.

Marginal cost of funds = Marginal cost of Borrowing X 92% + Return on Net worth X 8%

For exact calculation, you can refer to the RBI Circular.

  1. Negative Carry on Cash Reserve Ratio: Banks have to keep a certain level (4% as on April 5, 2016) of their deposits with the Reserve Bank. This ratio is the Cash Reserve Ratio (CRR). Banks don’t earn any interest on the amount. Essentially, they can use 96% of the deposits for lending and the remaining 4% does not earn the bank anything. RBI allows some leeway for this with adjustment to the
  2. Operating Costs: Bank’s costs are not limited to interest it pays on deposits. There are expenses on salaries, branch rent or other expenses that are not directly charged to the customers. Cost of raising funds is also included under this head.
  3. Tenor Premium/Discount: Higher the loan tenor, higher the tenor premium. Tenor refers to the period of interest rate reset. Even though your loan tenor is 15 years but if the loan reset is done every year, 1-year MCLR will be applicable.

How many MCLRs?

The Reserve Bank has directed banks to set at least 5 MCLR rates viz. overnight, 1 month, 3 months, 6 months and 1 year. The banks can choose to have more (for longer tenors).

You might ask, which MCLR did I arrive at using the formula in the previous section? That depends on the distribution of bank’s deposits across various maturities. RBI has specified procedure to find out. You can refer to RBI Circular for the same.

Once you have arrived at marginal cost of funds with adjustment for CRR and operating costs and know the applicable tenor, you apply tenor premium/discount to arrive at other MCLRs.

For instance, if the MCLR was for 6 months, you will apply tenor discount for overnight, 1-month and 3-month MCLR. On the other hand, you will apply tenor premium for 1-year (or higher tenor) MCLR.

RBI has not specified how to calculate tenor premium/discount. It is bank’s discretion.

All the loans will be offered at applicable MCLR + Spread.

What about this spread?

MCLR is merely to assess the cost of funds to the banks.

The banks will also charge a premium based on your credit worthiness. The spread may depend on your credit score or bank’s assessment of your repayment ability.

The banks can change the spread in MCLR linked loans (could not do so earlier in base rate regime). However, it is not so easy.

The spread charged to a customer can be increased only in case of deterioration of credit risk profile of the borrower. Such decision must be supported by complete risk profile review of the borrower. Hence, increasing the spread may become operationally difficult for the banks.

When will Banks publish MCLR? When will the interest rate be reset?

The MCLR will be reviewed on a monthly basis i.e. banks will disclose MCLR for various tenors every month. All the new loans during the new month will be offered at latest MCLR +Spread.

However, your loan interest rate may not get revised every month. It will be done at the next interest rate reset date as provided under the loan agreement between you and the bank. This interest reset period cannot be greater than 1 year.

For instance, your loan is linked to 1-year MCLR (say 9.1% p.a.) and the next reset date is March 1, 2017. Even if 1- MCLR is revised downwards to 8.9% p.a. in May, 2016, you will have to wait for at least till March 2017 before a lower MCLR can apply to your loan. Please remember 1-year MCLR announced for the month of March 2017 will apply to your loan at the next reset date.

Reset period is at the discretion of banks. Kotak Mahindra Bank has chosen to reset home loan interest rates every six months (Kotak Mahindra Bank is using 6-month MCLR for home loans). On the other hand, SBI and ICICI Bank will reset home loan interest rates after 1 year (SBI and ICICI Bank are using 1-year MCLR for home loans).

These are the MCLR rates for various maturities announced by SBI.

SBI MCLR Switch from base rate to MCLR

You are not really concerned about how MCLR is calculated. Are you? You want to know how it affects you as a borrower. Will your monthly EMI go down after MCLR is introduced?

How does MCLR regime affect you?

In this section, I consider the borrowers who take fresh loans under MCLR regime.

At the outset, it appears that interest rate policy transmission should be much quicker in MCLR regime (as compared to Base Rate regime). MCLR is more transparent.

If the RBI cuts repo rates and cost of borrowing in the system goes down, you can expect reduction in your EMI much sooner.

The only issue is that you will have to wait till the next interest reset date before you get the benefit of lower interest rate. In such cases, you may consider refinancing your loan from another lender.

Since the MCLR has to be published every month, banks cannot hide their borrowing cost from the customers.

Do note MCLR is a double edged sword. Just as you expect interest rate cuts to be passed quickly, you must also expect interest rate hikes to be passed soon. However, I don’t think it matters much. Banks are always quick to pass on the interest rates hikes. It is when they have to reduce interest rates that they keep inventing excuses.

PersonalFinancePlan Offerings

What about the existing borrowers?

MCLR is applicable to all loans made on or after April 1, 2016. If you borrowed on or before March 31, 2016, your loan will still be linked to base rate. However, you can switch from base rate to MCLR at mutually agreed terms between you and the bank. The bank can charge you a fee for the switch.

Should you switch your home loan from base rate to MCLR?

Too early to say. It depends on what conditions (fee etc) your bank is offering you for switch. You will not be able to switch back to Base Rate Regime. Additionally, consider the spread that the bank is offering under MCLR regime.  If you are getting a better deal under MCLR regime, then you can switch.

With housing loans, you can always refinance your loan from a lender offering lower interest without prepayment penalty; hence the MCLR regime adds only limited value.

What will be the impact on other loans?

All floating rate loans sanctioned on or after April 1, 2016 will be under MCLR regime. Even fixed rate loans up to a tenor of 3 years will be brought under MCLR regime.  Fixed rate with tenor of more than 3 years will be exempt from MCLR regime i.e. banks will have discretion in pricing the product.

Typically, personal loans are less than 3 years while tenor of a car loan exceeds 3 years.  You can expect banks trying to push tenor of fixed rate loan products to over 3 years to avoid MCLR regime.

PersonalFinancePlan Take

I trust banks to find a way around MCLR. Hence, I am not sure of the extent to which borrowers will benefit from move to MCLR regime. Nonetheless, MCLR is clearly more transparent and it appears banks have less discretion.

 

Following section added on October 20, 2016

Mathematics behind decision to switch from Base Rate to MCLR

In this section, I will focus on the numbers that you need to work out to decide whether you should switch your loan from base rate to MCLR.

I will make many assumptions. For instance, I have assumed the base rate (+spread) and MCLR (+spread) will remain constant during the tenor of the loan. This assumption is extremely unlikely to hold true. However, it will give an idea about the difference a switch can make.

Banks charge a fee for switching your loan from base rate to MCLR. Banks may charge a fixed fee or a fee linked to your loan amount or use any other method. It is entirely bank’s discretion.

If you have to switch, total savings from the switch should comfortably exceed the switching fee. Remember you will have to pay service tax on the fee too.

Your decision will depend on many parameters:

  1. Outstanding Loan amount: Higher the loan amount, higher the savings due to reduction in interest rate.
  2. Outstanding Loan Tenor: Higher the loan tenor, greater than savings due to reduction in loan interest rate.
  3. Interest Rate Differential: Higher the difference between base rate (plus spread) and MCLR( plus spread), greater the savings. I have assumed MCLR is lower than base rate.
  4. Switch fee: Lower the switching fee, better the proposition for you.

Let’s try to understand with the help of an example. I have considered two loan amounts of Rs 15 lacs and Rs35 lacs, loan tenor of 5, 10 and 20 years and different values of MCLR linked loan rates. Base rate (plus spread) is assumed constant at 9.8% p.a.

 Switch from base rate to MCLR calculations 1

You can see the savings increase with the increase in loan amount, loan tenor and the rate differential.

Now you need to compare your savings with the switch fee that the bank is charging you. Additional point to note you pay the switch fee upfront while the cost saving is through a lower EMI every month.

There is an additional issue with the above approach.

Banks typically don’t change the EMI but only adjust the tenor. Hence, the above analysis may not be very useful.

With lower interest rate (under MCLR), bank will lower the tenor and keep the EMI same.

Let’s see the impact.

Switch from base rate to MCLR calculations 2

You may note that the absolute savings under the second method (reduction in tenor) are higher than the first method (reduction in EMI).

Under the second method, all the saving comes at the end of the loan tenor (since the EMI remains constant). Under the first method, you save a small amount every month in the form of EMI. That explains the difference.

If you need assistance in working out these numbers, you can try EmiCalculator website.

Given these numbers, what will you do?

You compare these savings with the switch cost. Switch to MCLR if the saving is significant.

You must also note the timing of cash flows.

For instance, under the second method, all the savings are at the end of the loan tenor.

For a loan of Rs 35 lacs (outstanding amount) and tenor of 20 years, you save 23.82 EMIs by switching from base rate to MCLR (9.25%). That is a cost savings of Rs 7.93 lacs.

Let’s suppose the bank asks a fee of Rs 50,000 for the switch. You have to pay Rs 50,000 for saving of Rs 7.93 lacs. Seems like a really good proposal.

However, do not ignore that the saving will come in 19th and 20th years while the switch fee has to be paid up front. You could have invested Rs 50,000.

Rs 50,000, if invested at 8% per annum, will yield Rs 2.33 lacs in 20 years. At 10%, it will grow to Rs 3.36 lacs. By the way, you could have discounted the savings and compared with Rs 50,000.

Even after adjustments, you can see cost saving is much higher. Hence, it may make sense to switch.

However, if the bank were to ask for the same fee of Rs 50,000 (for MCLR rate of 9.5%) for a loan of Rs 15 lacs, it wouldn’t make much sense. The saving is only Rs 1.99 lacs.

Planning to prepay your home loan?

You could have also used the switch fee amount to reduce outstanding loan amount. After all, part pre-payment will also result in lower interest outgo.

If you are planning to pre-pay your loan aggressively, you must reconsider your decision to switch even if mathematics in the previous section is favorable.

This is because, as your pre-pay the loan, the outstanding tenor goes down. As the loan tenor goes down, the benefit of switching to lower interest rate will also go down.

It is quite possible that you may be better off pre-paying the loan than paying fee to switch to MCLR.

For instance, for a loan of Rs 15 lacs for 20 years, you save 1.99 lacs by switching to MCLR at 9.5% p.a. If you had used Rs 50,000 to pre-pay the home loan, then you could have saved Rs 3.36 lacs over the loan term. Hence, in this specific, you are better off pre-paying loan.

And this is just for one prepayment.

So, if you have plans to pre-pay loans, include such pre-payments in your analysis.

Do note I have chosen numbers to suit my argument.

I do not mean the pre-payment is better than switching to MCLR.

All I am saying is that pre-payment is an aspect that you must consider and that regular prepayments will lower your switching benefits.

For your case, the loan amount, tenor, rate differential, switch fee and prepayment plans will determine your course of action.

Note: Many readers have asked me in the comments section whether they should switch from Base rate to MCLR linked loan by paying a switch fee. Advise you to appreciate that, in the above analysis, I have made a few assumptions which are unlikely to hold true. For instance, it is unlikely that the interest rate differential (between MCLR and base rate linked loan) will remain constant across the loan tenor. Hence, any suggestion that I give in the comments section must be considered in this light.

The post was originally published on April 6, 2016 and has been updated since.

Additional Read:

RBI Circular on MCLR

RBI FAQs on Marginal Cost of Funds Based Lending Rate

Article on MCLR on Capital Mind

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Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

262 Responses to Decoding MCLR: Should you switch from Base Rate to MCLR?

  1. Pradeep says:

    Hi,
    The banks have already found a way of cheating in MCLR. The spread over MCLR is supposed to be based on the risk profile of each borrower. But the banks have simply applied the current spread they have on the base rate to the MCLR on all customers.
    Also the Operating expenses component on MCLR will be higher for govt banks like SBI than private banks like ICICI since they are efficiently managed.
    But the private banks wont lend any lower than govt banks, its always the SBI that announces MCLR first and then private banks follow.

    So any reforms in India will not reach common man, its a pity in the so called democracy.

    • Deepesh Raghaw says:

      Dear Pradeep,
      I had mentioned they will figure out a way. Bankers are too smart to sit quitely.
      That’s the way it is, not just in India but everywhere.
      And it is not just banks. Everyone does that. Even common man like you and me.
      About spread, even spread on base rate is a measure of risk only. So, I am ok with that.
      SBI is the big boss. Whatever it does, everybody toes the line.
      However, MCLR is more transparent for sure. The new lending costs will be in line with new borrowing costs. They won’t to be to have it both ways. Or so I think :)

      • Pradeep says:

        Hi Deepesh,
        How can spread be the same for all borrowers? Is it not directly violating the guidelines of RBI? I mean this way they can reduce MCLR to 9% in May and increase spread to 0.5% keeping the rate constant at 9.5%. How will RBI address this now?
        Also just checked SBI Maxgain loans have 0.35% as spread which makes the final rate as 9.55% same as the base rate+ spread last month.
        Will RBI just keep quiet seeing how this has panned out?

        The worry for me is, when RBI increases rates to 8% in future, these people will take MCLR close to 11% because of the higher MCLR they have started with today. In the last 5 years the maximum base rate of SBI was 10% when Repo rate was 8% 2 years back. So effectively banks seem to be the only one to benefit out of this exercise. Well of course people like Mallya benefitted too…

        • Deepesh Raghaw says:

          Hi Pradeep,
          RBI does not issue any guidelines for deciding the spread. It is completely internal matter of the bank. It is just that determination of spread should be fair. A process should be followed and it should not be arbitrary.
          It can even be same for all borrowers. Btw, I am not saying it is same for all borrowers. All I am saying RBI does not regulate this.
          What you need to focus on is, Has SBI increased spread over MCLR just to bring it in line with older interest rate on offer?
          From what I have read, the rates for the new borrowers have come down (from 9.55% to 9.45% p.a.)
          Yes, MCLR is a double edged sword. There are no two ways about it. You can expect rate hikes to be passed to you much faster under MCLR
          regime.
          In my opinion, it is a good way forward. MCLR is much more transparent. However, I do expect banks to find a solution around this.
          Wait for sometime. Let’s watch the space for a few more months and then form an opinion.
          Please understand MCLR depends on borrowing costs too. Let the deposit rates come down. If MCLR does not come down even after cuts in deposit rates, then you can sense foul play. Think we should wait till such time.

          • Sachin Zanwar says:

            I have Home loan with 220 lakh. Current iinterest rate is 110.40.bank is ready to reduce rate to 110.10 without any eextra cost.It will Shift loan from base rate to mclr. One thing rate will be fixed for 1 year.if I Shift to axis bank with only 1000 rs stamp duty they offering me loan at 9.10 so what to do.

          • Deepesh Raghaw says:

            Dear Sachin,
            Your home loan interest rate is quite high at 11.4%. Switch to another bank, if possible.

  2. Manish says:

    Dear Deepesh,

    I have taken a home loan from SBI Pune. I completed the documents formality on 27th Apr 2016 and disburse the amount on 2nd May 2016. I have taken Max gain Home loan. I have checked that the interest rate is decreased wef 1st May but is not passed on me.

    I have checked with the branch Manager SBI, he is not cooperative and said if it would be applicable to old customer than it would be automatically passed on to you.

    Please assist that what should I do in this case to get the benefit of lower interest rate?

    Does MCLR rate applicable to me?

    Your view should I swtich Maxgain HL to normal term HL?

    Thanks in advance.

    • Deepesh Raghaw says:

      Dear Manish,
      Reset period for SBI home loans is 6 months, I think.
      MCLR has interest reset period.
      If you took the loan in May, your loan interest rate will get revised only after 6 months.
      So, you will have to wait for 6 months atleast before your interest rate is revised.
      MCLR is applicable for all loans.
      In my opinion, you should have got loan at the new MCLR + spread.

      • Manish says:

        Thanks for your response.

        But now the interest rate is revised to 9.45% p.a.. Is it applicable for me too?

        • Deepesh Raghaw says:

          Revision will apply only after six months i.e MCLR prevailing at that time will apply to your loan.
          In my opinion, you should have got loan at May MCLR in the first place.

  3. Archan Pagedar says:

    Hi Sir,

    I have taken SBI MaxGain Home loan on 23-Oct-2015. My interest rate is 9.5% based on Base rate. I want to know when my interest rate will change, as the interest rates are switched to new MCLR. So there is no any revision in Base rate since long time.

    In this regard, should we switch to lower MCLR?

    Thanks.

    • Deepesh Raghaw says:

      Dear Archan,
      When your base rate will change? SBI will decide.
      MCLR, due to its structure, will be revised much faster.
      Do note both interest rate cuts and interest rates hikes will be transferred faster under MCLR. So, MCLR is a double edged sword.
      Even with MCLR, you will have interest reset periods.
      At the moment, SBLR MCLR rate is not very low (compared to base rate). It is 9.35% for women and 9.4% for others. So, no serious difference.
      Banks may charge money for switching from base rate to MCLR.
      Have you checked this with bank?

  4. Priyank says:

    I have received a sanction prior to March 31, 2016 from Axix bank.

    So, I have two option right now to take loan.
    1. Continue to operate on base rate
    2. Switch to MCLR

    Loan amount is 40 lacs & for 20 years.

    Which option should I take ? and why ?

    Thanks

  5. Manish says:

    Hi Deepesh, How to calculate the tenor premium/discount? Any example will really help.

    • Deepesh Raghaw says:

      Dear Manish,
      I have limited understanding of how the bank calculates it.
      As I understand, it is bank’s discretion.
      They will use some methodology but RBI has left it to bank’s discretion.

  6. Binay says:

    Hi Deepesh, thanks for such a helpful tip. I have one question , I had taken SBI home loan in January 2015 and my home loan interest is being shown as 9.45% and its not decreasing can you help me how to know what is my Base point for the loan sanctioned and when the home loan interest will go down for my case ( non MCLR case ) ..

    • Deepesh Raghaw says:

      Dear Binay,
      Thanks!!!
      Base rate is same for all the customers of the bank.The difference is in the spread over the base rate.
      As I see, the base rate is 9.15% p.a. Your spread must be 0.3% (30 basis points)
      Only SBI can tell when they will reduce the base rate. A lot depends on external parameters too.

      • Chetan says:

        Thanks a lot for the comprehensive article on the subject

        I am an existing borrower and want to shift to MCLR regime. Request you to please provide link to download the form for making the application for conversion from Base rate to MCLR

        Thanks in advance

        Regards
        Chetan

        • Deepesh Raghaw says:

          Dear Chetan,
          You are welcome. Please do share the post on your social media pages.
          Every bank will have a different form.
          Visit your bank website or bank branch to get the form.

  7. Mehul says:

    Dear Deepesh,

    I want a small opinion from you. I am planning to get home loan from IDFC bank and they have a product of short & sweet home loan . They are offering me the interest rate of 9.65% wherein they say that their base rate is 9.5 % + .15 % margin on that.
    So my query is .15% margin good for us or its higher ? And also if there is any interest rate cut , will it decrease the base rate and margin would remain same ?

    And regarding reset date what they say is ” In the event of change in base rate, the interest rate on your loan will be reset on a monthly basis. The reset date will be 1st day of every month for short and sweet accounts and EMI cycle date for other loans. ” So can u pls explain whehther this monthly reset date is good or no.

    Need your valuable feedback

    • Deepesh Raghaw says:

      Dear Mehul,
      Loans are typically offered at a base rate + spread or (MCLR + spread).
      Base rate (or MCLR) is typically common for all borrowers. Spread varies across borrowers.
      It is reflective of your repayment ability. So, if you have higher loan repayment ability, the spread will be lower.
      Since April 1, 2016, all floating rate loans (including home loans) are being offered at MCRL + spread.
      Home loans at IDFC are linked to 1-year MCLR. 1-year MCLR is 9.5% p.a.
      0.15% is fine. It is the bank policy. So no extra charge for you.
      http://www.idfcbank.com/personal-banking/home-journey/home-loan/short-and-sweet-home-loan/pricing.html
      It offers two types of loans.
      1. Regular
      2. Short & sweet facility: Rate is higher in this loan. However, it is like SBI maxgain loan where you can part surplus funds in your loan account to save on interest.
      With home loans, you always have facility to prepay loan without penalty. Would suggest you go for regular loan (and not short & sweet faciity). It is 9.65% vs 9.9%. You are paying 0.25% more in short & sweet plan. The difference is too big.
      Since the loan is on 1-year MCLR, your loan interest rate will be reset only after 1 year (and not every month) even though MCLR can be revised every month.
      When don’t you try with other banks? You might get cheaper rates.

      • Anonymous says:

        Dear Deepesh,

        Thank you for your reply.

        The interest rate of short & sweet facility is 9.65% as what they have told me, though website would be mentioning 9.9%.
        And with the provision of surplus funds being able to park in current account , we can also withdraw the amount as and when required without any charges.

        I wanted to understand if the MCLR can be revised every month , why the interest reset period is of 1 year.

        • Deepesh Raghaw says:

          I understand. In my opinion, 25 bps (0.25%) is too much price to pay for this facility.
          With home loans, you always have an option to make a part prepayment.
          About reset, don’t know the reason myself. But that’s the way it is.

  8. Vishal says:

    Hello Deepesh,

    I have gone thru the blogs. It was really useful to understand & decide upon MCLR over BR.
    Thanks for sharing the knowledge.

    my home loan is with IDBI worth 35Lac @ 9.7% present ROI.
    I am offered 9.3+0.15=9.45% @MCLR with charges of 0.1% nearly 4000Rs
    This is saving few of my EMI’s which I think is worth to opt for.

    • Deepesh Raghaw says:

      Dear Vishal,
      25 basis points is a big difference. And they are asking you to pay merely Rs 4,000.
      Grab the offer with both hands.
      Switch to MCLR.
      Good luck!!!

  9. Hiren says:

    Hello Deepesh,

    I have taken home loan from ICICI bank of 33 lac on 31/7/2015 @ 9.90 interest rate. Currently my home loan interest rate is 9.55 and my remaining home loan is around 30 lac. I have inquired to switch over to MCLR scheme with interest rate @ 9.45. The manager told me to pay 18,000/- rupees with deduction of 3 EMIs. Please guide me 1) Is it worth to switch over to MCLR or continue with current base rate ? 2) Is it right time to switch over or still I have to wait till what time?

    • Deepesh Raghaw says:

      Hi Hiren,
      The difference is not too much (9.45% vs 9.55%). Just 10 basis points.
      The comparison is Rs 18,000 vs saving 3 EMIs.
      Once you discount the cashflows, the difference will not be as much. If you work out the maths, you can find out.
      What is your EMI, outstanding loan amount and loan tenor? You can compare two scenarios.
      1. Prepayment of loan by 18K
      2. Conversion to MCLR by paying 18K
      When do you finish loan earlier? I can’t do in absence of info mentioned above. Choose the option where you finish earlier.
      If you do not want to go through all this, simply switch to MCLR. It is clearly more transparent than base rate.

      • Hiren says:

        Thanks Mr. Deepesh for your valuable suggestion.

        My current monthly EMI is Rs.31915/-.
        Outstanding loan amount is around 30 lacs.
        Remaining loan tender is around 15 years.
        I can finish my loan earlier by next 5 years by prepayment.

        Now tell me please.

  10. Prasad says:

    Hi Deepesh,

    Firstly, let me thank you for your amazing insights on this topic. I myself a banker by profession and this is one of the few blogs I have loved to read till end.

    I infer from this blog that you would suggest to switch over to MCLR at a given chance because of it’s transparency and I share this feeling with you. Also, banks are obliged to pass on the revised rates on the reset dates which is sure to happen unlike with Base Rate.

    I would pounce on the offer like Vishal has got. Unfortunately, I am in Hiren’s boat. I have not yet approached ICIC for their offer for the change over, but If I wish to move my 33 lacs loan currently at 9.45 with EMI 32,415 and a tenor of around 16 years (run down of 20 yrs coz of rate cut) and of no intention to pre-close because of the tax rebate I am enjoying. Would love to have your suggestion on this.

    • Deepesh Raghaw says:

      Hi Prasad,
      You are welcome. Appreciate your kind words.
      You are already at 9.45%.Think even MCLR rate is 9.45% p.a. only. Hence, no need to switch by paying a fee.
      See, at the end of it, it is a spreadsheet analysis.
      Everything else being equal, I will prefer MCLR over base rate.
      First find out the cost of switching. Only then, an informed decision is possible.

      About tax benefits, sometimes these tax benefits on home loans might be over-hyped. Suggest you go through the following post.
      http://www.personalfinanceplan.in/opinion/do-not-overestimate-tax-benefits-on-home-loan-repayment/
      I understand it is a very personal decision. There is no right or wrong. Let me know your comments.

  11. Prasad says:

    Thanks Deepesh. If the rates are one and the same (the June rate is rather even more expensive – 9.50), I’ll chuck the idea.

    On the tax rebates, you just fuelled my curiosity by sharing that link. Let me read through. Definitely coming back for your brainers on that.

  12. Girish G says:

    Hi Deepesh,

    Thanks for the detailed explanation on MCLR. However one i thing was not clear. If my loan is based on MCLR @ 6 Months does that mean even after the rate change i have to wait for 6 months for the rate change to come into effect ?

    Also i need a suggestion on my current home loan. I have an outstanding loan of 16 Lakhs with Corporation Bank at 9.65% and i want to go for an top up of 3 Lakhs for which Corporation bank is charging 10.05%. However ICICI is offering HL at 9.45% (9.15% MCLR rate + 0.3% Spread) and Top up at 9.55%. Pending tenure is 170 Months.

    If i do the calculation i am definitely saving Rs 35000 over the entire tenure (with an assumption of same interest rates all through) if i move to ICICI.

    However i am bit confused if i should go switch from Government bank to a private bank as i feel if at all there is any default the private banks make you pay heavily. Please suggest.

    • Deepesh Raghaw says:

      Hi Girish,
      You are welcome. Interest rate reset will be done a 6-month or 1-year intervals as applicable.
      So, you don’t have to necessarily wait for 6 months. You merely need to wait till the next interest reset date.
      Go through ICICI Bank letter of amendment for home loans. You will get an idea.
      http://www.icicibank.com/managed-assets/docs/personal/loans/letter_of_amendment.pdf
      About your query, do consider the ancillary charges too. Do not just focus on interest rates.
      Nobody can comment about how interest rates for corporation bank and ICICI Bank will shape up. No point breaking head over it.
      Don’t default. If you think you might default, avoid taking a loan. Seek assistance from friends/family if borrowing is unavoidable.

  13. Girish G says:

    Thanks Deepesh. No i don’t want to default but this just in case situation.

    With regards to Ancillary charges didn’t find much difference between the two.

    • Deepesh Raghaw says:

      Sure. No one does. Compare all the charges. Then, it is a simple spreadsheet analysis.
      Good luck!!!

  14. Ankit khanna says:

    Hi Deepesh,
    I am planning to take top up home loan of 10 lacs @ 9.55%, SBI. And then I ll use this amount to open saving account in post office on my father’s name (Sr citizen and his annual income is nil) and then we ll get interest rate of 8.6%. Loss of 1% can be cover because I ll get tax benefit on interest part. After 8-9 yrs the money will be mine. Is their any catch in this plan?

    • Deepesh Raghaw says:

      Hi Ankit,
      Don’t do that. You won’t get any tax benefit. Tax benefits are only for construction/purchase of house.

  15. SANJAY C says:

    I have been offered by IDBI (MCLR) 9.45 % against existing of (base)9.75
    Loan Amt 15.5Lacs
    No. of EMI will reduced to 164 from 170
    charges -Rs.1723/=

    Please suggest I should grab it or not ?

    • Deepesh Raghaw says:

      30 basis points is too high.
      Assuming Rs 1723 is the total cost of switching, you must switch to MCLR.
      Grab the offer.

      • arif says:

        Sir,
        I have been given the same offer by IDBI. 9.45% (MCLR (9.30%)+0.15%) against existing of (base)9.75%. But when I took the loan I was given a rate of 9.75% at the same rate of base rate with zero spread. BUt now when shifting to MCLR they are asking for .15% spread. Is this procedure correct sir?

        • Deepesh Raghaw says:

          Dear Arif,
          Banks don’t offer home loans at base rate. There is a minor disconnect in your understanding.
          Even with base rate, you would have had a spread.

          • arif says:

            SIr,
            When I took the loan the base rate of IDBI Bank was 9.75%. I was given the loan at 9.75% itself. SO it is clear that I was given loan at Base rate itself

          • Deepesh Raghaw says:

            Ok. You are saving 0.3% by shifting to MCLR, which I think is huge.
            I don’t know how you got loan at base rate but there is nothing fishy if the bank is offering you MCLR + Spread. That’s how it works.
            So, relax.
            You can compare the switching cost with the number of EMIs you are saving by switching.
            That will help you make the decision.

  16. Nath says:

    Hi Deepesh,

    I have 7 year OLD Home loan in SBI (Maxgain Loan)
    Current interest interest rate is 9.3 + .25 = 9.55%
    New scheme offers 9.45% with switch charges of 10,000
    Based on your blog I think its not wise to switch as of now. Am I Correct?
    Also since its a Max gain I am using Overdraft facility to good affect.
    I am paying less interest (due to overdraft facility) compared to provisional calculation done by bank in beginning of financial year.
    However as per Income Tax Act, Tax exemption on Home Loan interest is based on provisional calculation done by bank and not based on Actual interest paid.
    Am I correct? Is there any catch in it?

    • Deepesh Raghaw says:

      Hi Nath,
      What is the remaining loan tenor?
      About benefit under Section 24, tax benefit is based on interest rate payable (this is more concerned with the timing of payment and not the quantum pf payment). Slightly tricky for me in case of SBI Maxgain. In my opinion, it should be actual interest paid for Maxgain loan. You can’t take tax benefit for the interest you have not paid.
      What does your interest statement show?
      Suggest you talk to a CA in this regard.

  17. Nath says:

    Hi Deepesh,

    Thanks for quick reply.
    My remaining Loan tenor is 13 years but I will be closing loan in maximum next 4 to 5 years.
    With regards to tax benefit on Max Gain scheme I shall consult my CA thanks.
    JFI There is slight difference between provisional interest certificate from bank and actual interest certificate (provisional is more than actual due to usage of overdraft facility)

    • Nath says:

      Just to add. Income Tax Act says as below.
      Last line is confusing…

      Interest on borrowed capital:-
      Where the property has been acquired, constructed,repaired, renewed or reconstructed with borrowed capital, the amount of any interest
      payable on such capital is allowed as a deduction.
      The amount of interest payable yearly should be calculated separately and claimed as a deduction every year.
      It is immaterial whether the interest has been actually paid or not paid
      during the year.

    • Deepesh Raghaw says:

      I forgot to ask your outstanding principal.
      In any case, if you are planning to prepay in 4-5 years, don’t go through the hassles.
      The difference is 10 bps only at the moment.
      You may be better off deposit this Rs 10,000 (and service tax) in your Maxgain account.

  18. Amarjit says:

    Hi, Deepesh, your blog was extraordinary and very helpful for unfortunate guys like Mr. My question- My sbi home loan was sanctioned on 25-03-2016. No demand raised by builder till 12-09-2016. On 14-09-2016, I deposited the first demand at bank and found out that my loan is under base rate with interest of 9.5%. Mclr plus spread is 9.3% but need to pay .59% plus service tax.pls tell me if this .59% is on total loan amount of 28 lakha or only on first demand amount? Also is there prepayment charges under Mclr?

    • Deepesh Raghaw says:

      Thanks Amarjit!!!
      Didn’t get your question properly. what is 0.59%?
      There are no prepayment charges on floating rate home loans.

  19. Amarjit says:

    Do u provide long term equity investment guidance with analysis?

  20. srinivas says:

    Dear sir,
    I am holding Home Loan in fixed rate 10.1% in LICHFL but from this month it is floating and it is shown as 11.1% but in online and even in the branch they informed that it will be around 9.4% for new and around 9.9% for existing.I want to know what to do whether to continue in same LICHFL or change the bank.SBI people saying that they will give at 9.35% and HDFC people says they will give at 9.4%.Really is it possible or they will make any other charges later.please suggest.

    Mail:thamminidisrinivasulu@gmail.com

    • Deepesh Raghaw says:

      Dear Srinivas,
      Clarify the rate with LIC branch.There is big difference between 11.1% and 9.9%.
      Yes, there will be ancillary charges by SBI and HDFC.
      Are you sure you will get the finest rates from SBI and HDFC? When you apply, they may offer you a higher spread.
      Hence, it is not easy to say.
      You must compare the all-in cost and not just the interest. Ask them to provide information about all the charges.
      Even after receiving all the info, you need to see if the effort is worth. If the amount outstanding is not high or the remaining loan tenor is short, you can do without switching loan.

      • Anonymous says:

        thank you deepesh for your clarification.Today Once again I spoke with SBI they says it is 9.4 only and the charges will be arround Rs18000.Secondly the out standing is around 24 lakhs and tenure approximately around 11 years.so can you clarify now what to do.

        • Deepesh Raghaw says:

          Your loan with LIC is at 11.1% or 9.9% p.a.?

          • Anonymous says:

            Now it is 11.1% and yesterday i spoken with branch manager and he confirmed the same .If i want to be 9.9 I must make regularise for that I must pay Rs1200 with the application stating to regularise.

  21. deepak says:

    thank a lot for such a insightful article. I just have a simple question,
    – i have taken 40 lakh loan from SBI @ 9.7% per
    – it for 20 years
    – they are asking 23k to switch from 9.7 to 9.3 (.58% of total loan)
    Question is , is it worth investing 23k one time to reduce interest rate?
    My remaining loan amount is 22 lakhs.

    • Deepesh Raghaw says:

      You were welcome, Deepak.
      Can you please provide the following info:
      1. Remaining loan tenor
      2. Do you plan to prepay the loan?

  22. Sanjay says:

    There is a case which is not covered above. Could you please help ?
    My existing loan from ICICI is at 9.40% (9.30% base or 0.10% spread) and at no cost i can switch to MCLR at 9.40% (9.05% MCLR + 0.35% spread)
    Since MCLR inception, ICICI has reduced MCLR thrice by 0.05% each, effectively 0.15% and base has been reduced only once by 0.05%
    My understanding is that ICICI has no incentive to reduce base compared to MCLR reduction because base rate doesn’t affect its interest rate for new customers.
    However as we have seen in another article of yours http://www.personalfinanceplan.in/opinion/banks-may-not-be-passing-mclr-cuts-to-new-home-loan-borrowers , banks keep on tinkering with spread and we have seen in past in base regime, to reduce new loans interest rate, spread was decreased and base kept same when rates were decreasing and this is bound to happen in MCLR too.

    What is your take for such cases where one simply switches from base to MCLR without change in interest rate?

    • Deepesh Raghaw says:

      Dear Sanjay,
      What is the point in spending time and effort when the rate (as of now) is same?
      MCLR is clearly more transparent but the banks are quite smart.

      • Sanjay says:

        Only positive point was that i think MCLR will get more reductions than base, effectively giving me a lower rate after next reset period.
        But as you said banks are quite smart, another thing that they can do is keep MCLR constant and reduce the spread later on

        • Deepesh Raghaw says:

          Don’t think they will change spread for existing loans that easily.
          But don’t trust them beyond a point.
          I think for now, you should not do anything.

          • Sanjay says:

            Thanks Deepesh. I will stay put with Base for now.
            I didn’t mean that they can change spread for existing loans, but putting in a better way…
            “But as you said banks are quite smart, another thing that they can do when the RBI reduces repo rate, is to keep MCLR constant and reduce the spread for new loan offerings later on, effectively reducing interest rate for new customers, and keeping old customers at higher rate”

          • Deepesh Raghaw says:

            Got your point.
            I am quite clear. Never trust your bank and insurance company beyond a point.

  23. Sunilraja says:

    Hi,
    first i thank you for your informative article. i need your help on my issue. the issue is My Brother took a Home loan of Rs.2300000/- from ICICI home loan in 2006 at Floating interest. we paid nearly 12o months. now they claim again we have to pay more than 120 months. when i ask them about this they simply said based on the monthly floating rate of interest they change the EMI and tenure of the loan. i am not able to understand and not known that on what basis they fix rate of interest in case of floating interest? how can i find the FRR of ICICI from 2006 onwards? i am expecting your informations on this aspect. thanks.

    • Deepesh Raghaw says:

      Dear Sunil,
      Typically, when the interest rates go up, banks increase the tenor instead of increasing the EMI.
      On the other hand, when the interest rates go down, banks typically decrease the tenor instead of decreasing the EMI.
      What was the original loan tenor?

  24. Abhish says:

    Hi Deepesh

    Your calculations above were of help. I am in a dilemma and will need some advice. I have a home kon at basic rate. My loan amount pending is 12.61 lakhs with a tenure of 53 months at interest rate of 10.15%. I was informed about the MCLR today by the bank and they mentioned that I could move my plan to MCLR at a fee of Rs1451 with an interest rate of 9.45%. After movement the bank claims my tenure will drop to 51 months if I do not wish to change my EMI (changing tenure is my preference).
    Considering the timelines and the period what would you suggest I should do? Again I m not going to be very aggressive at pre payments, I may pay 20% of the current outstanding once in the remaining period.
    Appreciate your views

    • Deepesh Raghaw says:

      Hi Abhish,
      You are savings two months EMI by paying Rs. 1,451. As I understand, your EMI is around Rs 29,000.
      Mathematically, it may make sense to switch.

  25. Abhish says:

    If it’s of any relevance my loan is from IDBI bank.

  26. Ravi Shankar says:

    My home loan from Sbi maxgain is 4933000
    From April 2015 with pre emi till April 2018 ..my actual emi starts from may 2018.
    My interest is 9.3+.1 (9.4) base rate + spread ..for a tenure of 23 years .

    What happens if I switch to mlcr
    Does the spread of .1 remains same
    What is switch over charges

  27. garvi says:

    pls suggest as currently running loan with SBI max gain at 9.3 , should i switch tro mclr whihc would be 9.1 of 50 lacs loan .

    • Deepesh Raghaw says:

      Dear Garvi,
      Not enough information for me to comment.
      Please follow steps as given in the post to figure out.

      • neel kant mahato says:

        I have taken home loan from IDBI bank at base rate 10.25.My outstanding loan amount is Rs. 166000 and remaining tenure is 13 years. Now the base rate is 9.65 and mclr rate is 9.3. I enquired wuth bank to switch over from base rate to mclr. They told me that I have to pay .1% and serv tax of outstanding amount which is about rs. 2000. Can I switch to mclr from base rate. Mclr reset period is 1 year. Whether my mclr will change or not if there is any change in mclr with in 1 year. Thanks in advance

  28. amey says:

    hi,

    Thanks a lot for this article is helps me a lot.

    Just want to ask one thing, how u have calculated New Number of EMI , please give the formula , as I am trying to calculate the same with my loan amount.

    • Deepesh Raghaw says:

      Thanks Amey.
      Request you to share the post on your social media pages.
      Use Nper in excel to calculate number of EMIs.

  29. theGeminiGal says:

    Hi Deepesh,

    A very useful article and interesting Q and A too.

    I have a SBI Maxgain HL taken in Oct 13- Rs 24 Lac. The current ROI is 9.6% [Base rate + 0.3%] and I pay EMI of Rs 22k.
    I checked with my bank and they have asked for switch-over fees of Rs. 12k for current MCLR linked rate.
    Need your suggestion on the same- should I switch.

    • Deepesh Raghaw says:

      Thanks!!!
      What is the new tenor of the loan?
      You need to follow steps as mentioned in the post to arrive at a decision.

  30. Narender says:

    Hi Deepesh,

    I am having Housing loan with SBI. I took it in 2012 along with the Home loan insurance and currently it’s on 9.55% interest rate. I have placed a request for MCLR conversion in June 2016 after the RBI announcement of MLCR rates from 1st April 2016. Then SBI manager told that they have some software issues in converting my loan to MLCR. They are facing only software issues only with the loans which are having the insurance. I have been chasing them for the conversion but still it’s not converted to MLCR rate. I have even reported the same to RBI Banking Ombudsman. Then SBI reported the same software issue to the RBI also. Due to the software issue at SBI and due to the inability in fixing the software issue I have been paying the extra interest (i.e. as per the Base Rate 9.55%). Also there is no expected time lines when the software issues will be fixed in SBI. Could you please let me know to proceed in this scenario.

    Thanks and Regards,
    Narender

    • Deepesh Raghaw says:

      Quite bizarre. How long will the software issue go on?
      Something doesn’t seem right.
      Do you have any written record of this?
      Btw, what did the RBI say?

  31. Narender says:

    Hi Deepesh,

    Please see the below responses on each of the above questions.

    #1. From the last 7 months. This software issue is existing right from the beginning of the MCLR conversion effective date (1st April 2016). SBI implemented MCLR from the 1st MAY 2016 on wards. In 2012, SBI offered a Home loan insurance with a product name called “Surakha” Insurance and I opted for the same while taking my housing loan. So all the old home loan accounts (i.e. taken prior to 2012 or 2011 ) which are having the “Surakha” home loan insurance from SBI are impacted due to this software issue with the SBI.

    #2. I have a written complaint with SBI and SBI also replied in writing that they are unable to fix the software issue at this point of time. Its been more than 6 months and I have been following with them and they are mentioning that they are working on fixing the issue with their software vendor TCS. But in todays modern world a software issue is taking more than 6 months to fix with the a leading bank like SBI along with their software vendors.

    #3. The following is the RBI Banking Ombudsman response to my complaint. It’s also in written format to my complaint.

    a) The matter was referred to RACPC who has expressed regret and confirmed that the request for MCLR cannot be acceded to as the functionality of software is not supporting for the conversion of loan account at present.
    b) Further, it’s been advised by RACPC vide mail dated July 25, 2016 about the inability for interest rate conversion at present,
    c) It’s advised by the bank to keep in touch with RACPC for conversion when functionality will be available.

    Also recently RBI again reduced the base rates, but banks are not doing any changes to the existing home loans which are on Base rate. Banks are focussing only on the MCLR only. So customers who on legacy Base rate are still has to pay the old rate only. Also customers like me, when I opted for the MLCR conversion, SBI is unable to do the conversion even after 6 months due to the existing software issue.

    But there is one to give me a guaranty in written format that,my MCLR conversion request will be considered from the initial request date and interest/principle adjustments will be done manually or automatically by software to my loan account, when the software issue is fixed in future before my loan is closed or before the loan expiry of the loan term or whichever is earlier.

    I am thinking of legal help, but it’s a time consuming process.

    Could you please advice me if there any other way or if legal is the only option left, then the procedure for the same.

    Thanks and Regards,
    Narender

    • Deepesh Raghaw says:

      Hmmm. Reply from ombudsman is quite surprising. Completely siding with the bank.
      To be honest, I don’t know who to approach.
      Can’t you cancel the insurance plan and switch subsequently? Don’t ignore the coverage though.
      Why don’t you write about your story to Moneylife?

      • Narender says:

        Hi Deepesh,

        Thank you. Yes you are correct about the RBI reply.

        Insurance plan cancellation may be a solution but bank personnel is unable to give the 100% garantee up front thhat it will be converted to MCLR after that. Even if that fails, then I may be the victim of two (i.e. software issue and cancel of insurance coverage). Also cancellation of insurance removes the coverage.

        Well…Thank you very much for your time and also for the quick reply.

        Regards,
        Narender

  32. Narender says:

    correction

    Please read the sentence “But there is one to give” as “But there is NO one to give”

  33. Prahlad says:

    Dear Deepesh,

    Are banks liable to revise base as well from time to time? Whats RBI guide line on this when they roll out MCLR policy and totally forgot the population who are taken loan on base rate formula.

    Now banks are ready to convert the base rate to MCLR for existing customers, but keeping effective rate of interest same as that of base rate.

    • Deepesh Raghaw says:

      Dear Prahlad,
      Yes, banks should change base rates too. However, base rate calculation methodology is quite different and greater leeway to banks.
      Banks never forget to make money. The banks will deliberately ignore you but will never forget you.
      Btw, about asking borrowers to shift base rate to MCLR, I think this is the logical way forward.

  34. Prahlad says:

    Dear Deepesh, thank you for quick reply.

    I did think its logical but not aware of the catch.

    for Ex: current base+spread (9.3+0.15) together has Effective ROI =9.45
    but as per bank now MCLRY is 8.95, so MCLR+spread (8.95+0.5) will make ROI =9.45.

    ultimately they take 9.45% anyway. what is another solution you think here?

  35. Ragu says:

    Hi Deepesh,

    Really good number of articles i could found here. Thanks for your valuable guidance in personal planning. I have two queries.
    1. I have a home loan(27L remaining principle) in Bank of India with ROI 9.35%(MCLR)+0.30%(Spread) = 9.65%(in base rate). But currently the bank is offering home loan with ROI 9.35. I have requested to avail that. After long chase, they have accepted and offer to change my loan to base rate to MCLR with 9.35 and there is no charge for switching. Shall i go with that?
    2. Or i have another plan like takeover to SBI. Now SBI is giving loans under festival offers with ROI 9.15%, that is without processing fees. But any way i need to pay other costs like MOD, legal and other charges.
    Should go with MCLR conversion with 9.35% or switch to SBI?
    Please guide me on this.

    Thanks.
    Ragu.

    • Deepesh Raghaw says:

      Thanks Ragu!!!
      Please do share the posts you like on your social media pages.
      1. If there is no cost involved, it makes sense to switch to a lower rate.
      2. About festive offer from SBI, does the rate of interest change after a few months or years?
      Find out about exact costs involved.Subsequently, you can make a decision.
      Unless the costs are quite high or SBI rate is a teaser rate, 9.15% is far better than 9.35% p.a.

      • Anonymous says:

        Thanks for your quick response Deepesh. I am not sure about the SBI rate is teaser or not. The cost involved in the takeover would be around at least 25K. Still i shall go ahead with takeover or keep in same bank with 9.35% Please advice. i am quite confused now.

        • Deepesh Raghaw says:

          First, you need to figure out if the loan is teaser or not.

          • vpmragu says:

            Okay.. Let me visit the branch and check more details about it. Thanks Again Deepesh.

          • Ragu says:

            I am not able to reach the bank due to note denomination changes. Could you please tell me, what is teaser loan? what is the difference between the normal one. Can you please give me some more insight on that?

            Thanks in Advance…

          • Deepesh Raghaw says:

            Under teaser loan, interest rate is kept low for a few years and is then increased substantially after a few years.

  36. Prasad says:

    Hello Deepesh,

    First of all thanks for all your insights helps a ton to take informed decisions.

    I recently wanted to opt for a home improvement loan over my home loan with ICICI. Now, I have came across 2 different product from them 1) what they call as Top-up Loan which is ‘Personal Loan linked to Home Loan’ (https://www.icicibank.com/Personal-Banking/loans/home-loan/home-loan-top-up/index.page) and 2) Home Improvement Loan (https://www.icicibank.com/Personal-Banking/loans/home-loan/home-improvement-loan/index.page)

    I am not sure the purpose of these. What I understand is Home Improvement Loans are covered for principal and interests rebate for Income Tax and that is I wish for.

    Appreciate if you can shed some light.
    Many Thanks.

  37. Prasad says:

    Hello Deepesh,
    First of all let me thank you for all your insights which helps a ton for informed decisions.
    I wanted to go for a home improvement loan, although, I require it for personal use. The rational being it’ll be cheap and it’ll carry IT rebates against a personal loan.
    I am serving my home loan from ICICI Bank and so availing the requirement from there itself. Now, I have come across 2 different products from ICICI which is catering this need. 1) Home Improvement Loan (https://www.icicibank.com/Personal-Banking/loans/home-loan/home-improvement-loan/index.page) and the other 2) Personal Loan linked to Home Loan (https://www.icicibank.com/Personal-Banking/loans/home-loan/home-loan-top-up/index.page)
    I am not sure which will solve my purpose, since the wordings ‘Personal Loan’ in the product 2) makes me skeptical of it being eligible for the IT rebates I am looking for.
    Anxious to hear you take on this.

  38. Parag says:

    Hello Deepesh,
    Gone thru your complete info and responses to various queries. Really helpful to all. Thanks again.

    I had a Q – I had taken loan from Axis bank in 2009 & it is on PLR mode currently being charged @11.35%. when complained about quality of service, loan retention dept offered me to changed to MCLR. Pending Principal amt is around 11 Lacs and tenure wd be around approx 110 months. they are offering me 9.20% w 6 month MCLR @ swich fees of 5000+tax= 5750. Can you pls suggest how to go ahead in this..

    I also need to know wont the BPLR/PLR customers atumatiacally move to MCLR without any switch fees ?

    Appreciate your earliest feedback.

    Thanks
    Parag

    • Deepesh Raghaw says:

      Dear Parag,
      2.15% p.a for a fee of Rs 5,750.
      Sounds like a very good deal. Go for it.
      Banks never do things that are favorable to customers automatically. You have to fight.

  39. Parag says:

    Hello Deepesh
    I referred RBI cicrcular in this ragrds.. for switch from PLR to MCLR, I found following

    11. Transition to MCLR from Base Rate/ BPLR
    (a) Banks shall continue to review and publish Base Rate as hitherto.
    (b) Existing loans and credit limits linked to the Base Rate/ BPLR shall continue till repayment or renewal, as the case may be.
    Provided that existing borrowers shall have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.
    Provided that the switch-over shall not be treated as a foreclosure of existing facility.

    My Q is – what is meaning of last sentence ‘Provided that the switch-over shall not be treated as a foreclosure of existing facility.’ –> does it guide/allow/restrict bank to charge switch fees for changeover from PLR to MCLR.

    Pls guide.

    Thanks
    Parag

    • Deepesh Raghaw says:

      Parag,
      It means bank is not closing one loan and giving away another loan. Same loan is continued.
      Banks can charge fee for switching.

  40. Prashant says:

    Hi Deepesh,

    I have outstanding loan balance of 25.71 lakhs with LIC finance on 10.2 ROI , Am planning to move to ICICI as they are offering 9.2% in which rate is I-MCLR-1Y + 0.25%
    They are charging 11500 as processing feee will I get enough benefits to move on.

    LIC gave me a option to reduce to 9.85 from 10.2% by paying 1150 rs to them,
    Should I move to ICICI or stay in LIC will this MCLR benefit me.

    • Deepesh Raghaw says:

      Hi Prashant,
      The comparison is between 9.2% + Rs 11.5K and 9.85% + Rs 1,150. There is no information about tenor.
      You will have to work out the numbers as shown in the post.
      I have not worked out the exact numbers. Given the loan amount, I feel ICICI offer might just turn out to be better (atleast mathematically)

  41. Prashant Patil says:

    Thanks for great article.

    I got my loan sanctioned in April 2016, from SBI- WOMAN MAXGAIN -20 lakh- 240 Months -9.45%, NOW i ask bank to convert it to MCLR, they are saying they have no order from RBI to convert base rate to MCLR( orally when i visited branch ) before that i sent 2 emails but no answers, then i launched ONLINE complain, they closed it by comment : “Interest rate is being examined of the customer, customer advised ” how ever they are not ready to answer my emails giving me any circular etc.
    I am planning to visit RACPAC BRANCH OF SBI , EVEN SENT the email at higher level officer so my question :
    1) I sent emails no answer but saying orally as “they have no order from RBI to convert base rate to MCLR for existing consumers ” something is fishy ?
    2) when i contact to call center they say pay 0.5% of outstanding but not more that 5000 + service tax to bank to convert to MCLR so should i pay it my remaining amount is 19 L and tenure 230 months.
    3) home branch is saying wait for sometime rate will be reduced further and will be given benefit to u should i wait ( as effect of demonetization SBI chief Arundhati Mukharji said I -rate will be more go down )

    • Deepesh Raghaw says:

      RBI has asked banks to allow borrowers to shift from base rate to MCLR.
      Every bank will have a different policy or charges.

  42. jatinkarania@yahoo.co.in says:

    Hi Deepesh,

    I have taken loan of rs 1520000 from HDFC ltd with 9.4% ROI from 12th May 2016.
    After 6 months when all interest rate changes they are not changing in my home loan. And as per RBI guidelines loan taken after 31st march its rates should be calculated based on MCLR but they are saying it is calculted on base rate.

    When i visited branch they are asking me to change my rate of interest Manually.

    Can’t they do it automatically when my ROI is on floating based. HDFC is doing change rate of interest every quaterly but they have not change rate of interest on my loan inspite of decreases of interest all over.

    please advise.

    • Deepesh Raghaw says:

      MCLR has a reset period. As I understand, HDFC has 1 year reset period.
      Hence, your MCLR will change only after 1 year (MCLR may change many times in the interim).

  43. Anand says:

    I have a outstanding housing loan amount for Rs. 450000 from State Bank of Bikanar and Jaipur. Now, bank is offering to swtich from base rate to MCLR rates on a charge of 0.50 % of outstanding amount and + service tax. I am planning to repay the whole amount within 3-4 years, should I opt for MCLR or go continue with rate>
    one more thing is, is MCLR applicable after 1 year to all existing loan even after one dose not give his consent? pls sir clear this.

    • Deepesh Raghaw says:

      Dear Anand,
      As explained in the post, decision depends on interest rate differential, loan tenor, switch fee cost and your exact plan of prepayment.
      Considering that you plan to prepay, you can continue with base rate.

  44. Prabu says:

    Hi Deepesh,
    Thanks for this forum, which is answering many of our questions related to HL.
    I availed SBI Maxgain HL in Jan 2015 @ interest rate of Base Rate + 0.05%. Thereafter, whenever there was any change in the Base Rate, that was passed on to me. However, after introduction of the MCLR system, the change never happened in the Base Rate and it has become like a fixed interest even after reduction occurred so many times in MCLR.
    In this context my question is, whether the bank will change the interest rate if there is any reduction or hike the same if there is any increase in future?
    Since they are not passing on the reduction to the existing customers, they should not increase the same also, I feel. Please through some light on this matter, which will benefit the existing Base Rate customers to a considerable extent.

    • Deepesh Raghaw says:

      Dear Prabhu,
      Calculation methodology for base rate and MCLR is different.
      Base rate is based on average cost of funds while MCLR is based on incremental cost of funds.
      Hence, movement in MCLR and base rate may not be in tandem.
      MCLR will reflect prevailing interest rate much faster.

      Banks are always keen to pass on interest rate hikes. Not the other way round.
      But yes, you can expect interest hike transmission to slower in case of base rate.

  45. Suresh says:

    Sir,

    I have taken a power home loan 20Lacs in Axis bank in April 2016 at base rate currently base rate is 9.35% , where as current MCLR rate is 9.15%.
    Please suggest shall I switch over to MCLR.is there advantage ?

    Also I do part payment , please suggest shall opt for reducing EMI rate or reducing Tenure .
    Thanks

    Suresh

    • Deepesh Raghaw says:

      Dear Suresh,
      You got base rate linked loan in April 2016? Surprising if that’s the case.
      The information is not enough for me to make a decision.
      Suggest you go through the steps mentioned in the post to figure out.
      Btw, difference of 0.2% is not too high.

  46. Suresh says:

    Dear MR. Deepesh.

    Thank for quick response.

    Sorry for typo error , it was April 2015.

    Present loan balance principle amount is Rs 18,40,000/- base rate @ 9.35%.
    So please suggest shall I switch over to MCLR or should I wait for some more months.

    Also please suggest If I make part payment aganest principle amount , shall I opt for EMI reduce or reduce in Tenure . Which is advantage ??

    Thanks & Regards
    Suresh

    • Deepesh Raghaw says:

      Dear Suresh,
      Please work out the calculations. Will depend on loan tenure too.
      In my opinion, difference is not very high (9.15% vs 9.35%).
      Plus, you are locked in the same rate for atleast 6 months or 1 year.

  47. Suresh says:

    Dear Mr Roopesh.

    The loan tenure balance is 132months ( Original 152months–20months paid)@ Rs 22376 per month(EMI).Balance amount is Rs 1840000/-

    In this regard what would you suggest for part payment, it it worth to go for reduction in Tenure or reduce in EMI.

  48. suresh says:

    Sorry for the typo error in your name Mr. Deepesh.

  49. bhuvana says:

    Hi, I had availed home loan from IOB in 2006 at BPLR rates. Later all customers were informed to shift to base rate. But we never recd any communication and bank is still charging us at high rates 11.5% for home loan. How to rectify for current and past years also

    • Deepesh Raghaw says:

      Dear Bhuvana,
      You won’t get any relief for interest already paid.
      However, you can check with your bank the procedure for switching from BPLR to MCLR.

  50. Naresh says:

    Hi Deepesh, i have taken Home loan from HDFC in 2012, i have revised the rate of interest in Jan-2016 by paying 10K. can i convert my Home loan to MCLR, fees which i am going to pay is one time to change rate of interest and to link my home loan with MCLR. Otherwise every year i need to pay fees to HDFC to convert the rate. Currently every year i am paying nearly 10k to change the current rate of interest.
    Please provide your advice

    Thanks
    Naresh

  51. RAVI PANDYA says:

    I have taken loan from axis bank.right now i m on base rate and rate is 9.35 but when we go for mclr concept right now rate is 9.10.so i am very confuse about this.should i go for mclr?

    • Deepesh Raghaw says:

      Dear Ravi,
      It will depend on a number of things including interest rate differential, remaining loan tenor, outstanding principal amount and switch fee.

  52. alok kumar verma says:

    I have taken loan from axis bank sanjay palace branch. can you pls suggest me if i can do the partial payment then my tenure will be come or my EMI will be come?

  53. Dr. Virendra Agrawal says:

    Hello Deepesh,
    Hot topic… Awesome simplified and detailed at the same time which was so confusing for me earlier.
    My icici home loan started at 31 lakhs at 9.85% now currently it’s 30 lakhs at 9.45% (9.3+0.15)
    207 months pending, I have an offer of mclr 9.1% (8.9+0.2) but at a charge of 0.5% of principal outstanding plus service tax which approx is 18000.
    I won’t go into pre payment.
    Should I jump over?
    Waiting for your wise opinion.

    • Deepesh Raghaw says:

      Dear Virendra,
      You will save about 15 EMIs if you make the switch. But those EMI savings will towards end of the loan tenor while your outgo is upfront.
      However, even after applying discounting, switching looks like a good mathematical choice.
      Please understand there are many assumptions built into this analysis (as mentioned in this post).

  54. reetu says:

    Hi i have a sbi yuva home loan taken on sep 2013 of 6672000 for 30 yrs and now as on date it shows interest rate as 9.65 %. (40 points above base rate was stated at time of borrowing)

    With mclr now on jan 1 at 8 %., will it be beneficial for me to switch over and also take women borrower concession rate at 8.10 %. However I plan to prepay in next 7 years.

    • Deepesh Raghaw says:

      If the SBI does not cut base rate, then it makes clear sense to shift to MCLR. 1.65% p.a. is a lot of difference.
      Do consider the cost of switching.

      • reetu says:

        Thanks for promptly reading the comment and suggesting.

        Yes they are keeping base rate pretty much constant or adjusting very meagerly .

        Yesterday they reduced mclr by 0.9 (8.9 to 8) but reduced base rate only by 0.05 (9.3 to 9.25).

        Will reach out to racpc in person. No response from them on 4 emails i sent asking for info. I think Switch over fee of 0.57 of loan outstanding , might be demanded.

        Did not RBI asked banks to allow customers to switch to mclr. Not sure why banks charge.

        • Deepesh Raghaw says:

          Reetu,
          RBI has allowed to switch. And banks are allowed to charge fee for the switch.
          Banks lose money (or make lesser money) when the interest rate is lowered.

        • Ashutosh says:

          @reetu, did you manage to check with RACPC? Please update us all with your findings.

  55. snpalo says:

    my wife has taken home loan from sbi .my pending amount is 1500000 with interest rate 9.5%.today sbi has decreased intrest rates by 0.9%. will imy wife will get the benefit.loan was taken on jjan2016 but sanctioned on oct 2015. please reply sir

    • Deepesh Raghaw says:

      As I understand, your loan is on base rate.
      MCLR has been cut sharply. Unless SBI cuts base rate, you wouldn’t get the benefit automatically.

  56. Anubhav Jain says:

    Hi Sir,

    I have taken SBI MaxGain(SBI SURAKSHIT hl maxGN OCT13) Home loan on 23-02-2016. My interest rate is 9.45% based on Base rate(current interest rate). I want to know when my interest rate will change, as the interest rates are switched to new MCLR. So there is no any revision in Base rate.

    In this regard, should we switch to lower MCLR as now MCLR is 8%.
    Should in switch to term loan from Maxgain.(as MCLR is applicable to both loans and its floating).

    • Deepesh Raghaw says:

      Hi Anubhav,
      Banks won’t automatically switch your loan to MCLR.
      So, you have to check with them the switching cost involved.
      Big difference between 9.45% and 8% p.a. especially if the loan amount is quite high.

      • Anubhav Jain says:

        SBI website is showing 8.8% for max gain with 8% MCLR.
        Bank is charging for 0.57% of the loan sanctioned, which is 31 Lakh.
        Now should i shift to MCLR and switch to term loan from Maxgain.(as MCLR is applicable to both loans and its floating).

  57. Alan says:

    Hello Deepesh,
    I have taken a home loan of 2000000 from SBI(Maxgain) in Oct 2015. The loan rate till 31/12/2016 was 9.55%. They changed it to 9.50 % on 2/1/2017. I want to complete the loan within next six years. i have already made upfront payment of 400000 till date. The remaining principal is approximately 1420000. Shall i switch to the new MCLR rate or keep the existing rate of interest. Please help.

  58. Shobhit says:

    I have SBI Maxgain HL of 36L under base rate mechanism. Currently it is @9.45% post 1st Jan 2017 change. Till now bank has disbursed 18L. I have two questions:
    1)Will it be beneficial to swith to MCLR which is 8.6% currently.
    2) What is the SBI switching fees, and it will be applicable on what amount. Whether at full 36L or balance 18L

    • Deepesh Raghaw says:

      Shobhit,
      You need to look at multiple aspects including loan tenor and switch fee. Difficult to comment in absence of such info.
      Additionally note SBI has increased the spread to 0.65% from 0.25%. In the coming years, MCLR will go up and down but the spread will remain constant.
      1. Depends on additional information.
      2. Please check with SBI. There is no RBI guideline on the same.

  59. Suresh says:

    Dear Deepesh.

    I have taken 20.6 lacs home loan in Axis bank in Arpil 2015 , current loan balance is 1840000/- and balance tenure is 131months ( Original 152months–20months paid)@ Rs 22376 per month(EMI).
    Current base rate is 9.35%. Please clarify the below points
    1) Shall I switch over to base rate 9.35% to MCLR 9.0%
    2) If I pay part payment about 3 Lacs ,which is the better option to choose reducing tenure or EMI ( current EMI 22376/-)
    3) Is there any option to change the bank as SBI is giving customers lower interest rate 8.65%

    Looking forward your advise

    • Deepesh Raghaw says:

      Dear Suresh,
      0.35% is not too big a difference for switching. I am sure there is cost involved in the switch.

      • Suresh says:

        Thanks for clarification on point 1

        I would seek your opinion on pont 2 as mentioned earlier

        2) If I pay part payment about 3 Lacs ,which is the better option to choose reducing tenure or EMI ( current EMI 22376/-)

  60. Jayprakash Patel says:

    I have SBI Maxgain HL of 32L under base rate mechanism. Currently it is @9.50% post 1st Jan 2017 change.

    1) Will it be beneficial to swith to MCLR.
    2) What is the SBI switching fees.

  61. Gowtham says:

    Hi Deepesh,

    I have taken SBI (Max Gain OD) Home loan of 55 Lakhs for 20 years on May 2015. Now the interest rate is 9.25 %, if i change to MCLR the interest rate will be 8.75%.
    Is it worth change to MCLR ?

    Outstanding Amount to be paid: 43 Lakh.
    Remaining Tenure: 18.5 Years.
    Planning to pre pay: Yes-may be within next 10 years, i can close the loan.

  62. Kapil Garg says:

    Hi Deepesh
    I took home loan of 20 lakhs in 2013 at floating rate of interest which now stand at 9.5% after revision which took place yesterday.Please advise should I switch to new mode by paying conversion charge.

  63. PD says:

    SBI has recently announced a sharp cut in home loan rates and the 1 year MCLR now stands at 8%. However there is a sharp increase in the spread as well such that a maxgain loan under 75 lacs is now priced at a steep 0.8% premium to the 1 year MCLR (effective rate of 8.8%)

    I have a 24 year maxgain loan (~58.6 lacs outstanding) taken in April 2015 at base rate + 0.05% spread (current effective rate of 9.3%). I now have the option of switching to MCLR at no cost as long as I retain the original 0.05% spread over and above the current MCLR+spread. Now the dilemma is whether to switch to MCLR now and get a 0.45% lower effective rate for the time being but get locked into a much higher overall spread. I have a feeling that this switch will hurt me in the long term when rates start to rise as the spread will always stay constant. Also the base rate too will drop eventually though maybe not to the extent of drop in MCLR.

    Let me know your views.

    • Deepesh Raghaw says:

      Hi PD,
      I agree. This high spread can be tricky. By switching now, you will get locked in a very high spread.
      However, at this moment, you loan outstanding is high. Hence, there is significant saving by switching to a lower rate. And you can expect base rate borrowers to continue getting unfavourable treatment.
      The point is how long will you wait?
      Hence, may not be a bad idea switching now.

      • Ravee says:

        Dear Deepesh,

        Thanks for the excellent article.
        I just wanted to know, can I change my loan which is in base rate (9.25 + spread 0.05) to MCLR (8% + 0.8% mclr spread + 0.05 base rate spread) ad PD says, without any fee?, could you clarify?
        Thanks

  64. Anonymous says:

    Dear Deepesh,

    I found your article very informative.

    Presently, I have a home loan of 34 lacs for 22 years from Corporation Bank which I intend to switch over to SBI.

    I have below queries for my home loan.

    Is there any fee charged by SBI for switching of home loan form SBI Max Gain to Regular Term Loan and vice versa?

    As stated above I have a home loan of 34 lacs for 22 years. I can not pre pay any amount for next 3 years. But thereafter I may gradually start prepaying home loan. Hope to fully pre pay loan withing next 15 years instead of 22 years.

    I should opt for SBI Max Gain or SBI Regular Term loan for my home loan?

    Your views will be appreciated.

    • Deepesh Raghaw says:

      Cannot comment upon internal SBI policies. Request you to check with SBI.
      If you can’t prepay existing loan, how can you switch your loan to another bank?

  65. Kshah0206@yahoo.co.in says:

    Hi deepesh,

    I am having an home loan with axis bank with current base rate at 9.35% and axis bank is giving mclr at 8.85%. The bank is charging 10,000 plus service tax for shifting to mclr . Would you suggest shifting to mclr us this conditions.

    • Deepesh Raghaw says:

      Did you try the analysis that I shared?
      Will depend on many things including loan outstanding, loan tenure etc

  66. Rakesh says:

    Hi Deepesh,

    I have taken 38 Lakhs ( Tenure 20 years) as home Loan from PNB in April 2016( though it is approved in March 2016), I am not sure if it is MCLR or Base Rate . I have been charged with 9.45 %. Still it has same rate. Do you advise me to switch to MCLR now? and what will be the probable charges which I have to pay upfront?
    Thanks in Advance

  67. Gowtham says:

    Hi Deepesh,

    I have taken SBI (Max Gain OD) Home loan of 55 Lakhs for 20 years on May 2015. Now the interest rate is 9.25 %, if i change to MCLR the interest rate will be 8.75%.
    Is it worth change to MCLR ?

    Outstanding Amount to be paid: 43 Lakh.
    Remaining Tenure: 18.5 Years.
    Planning to pre pay: Yes-may be within next 10 years, i can close the loan.

    SBI switching charges is .58% of the total drawing power ie around 32000.

    • Deepesh Raghaw says:

      Given your loan amount, it may make sense to switch to MCLR.
      Please appreciate my analysis has limitations (as mentioned in the post).

  68. Sudhir Bellubbi says:

    Hi Deepesh,

    Your article and interaction has excellent way of decoding MCLR. I really appreciate the way it is explained.

    Can you help me on this pl.

    I have outstanding Homeloan of 26.52 lakhs with SBI.with 18.5 years pending

    SBI’s MCLR rate is 8.6 and Base rate is 9.3.

    The switch cost is 15k @ of 0.57% of bal amount.

    Difference in repayment amount is 2.4 lakhs at the end of loan period.

    Should I shift to MCLR ?

    My doubt is whether there can be situation in future that Base rate is higher than MCLR ?

    • Deepesh Raghaw says:

      Thanks Sudhir.
      Please understand my analysis has limitations.
      On the face of it, it looks like a good decision (to switch to MCLR).
      Do note you will be locking in a high spread.
      Yes, it is possible that MCLR can be higher than base rate. May happen when the rates are increasing. However, banks are reluctant to pass on interest rate cut, not so much with interest rate hikes

  69. ANIL VALA says:

    Dear Deepash,

    Firth, very nice blog and information sharing. I had a home loan of 13 lakhs from HDFC, present interest rate is 10.30 (since last Jan). I had callupon to HDFC about not reduce of rate. Whereas i have been inform that the rates change by BRI is on PLR and it will not effect to my loan. When i asked to switch over to MCLR they said no….your kind opinion will guide me to switich over my loan to other bank or ? please.

  70. Nikhil says:

    I have taken a loan in June 2016 on MCLR 9.2% PLUS .2% spread. Now they have reduced the MCLR to 8.2% plus spread .45%. My question is, can the bank increase the spread from .2 to .45 for the existing borrowers on MCLR? If yes, is there a risk now by asking the bank to re-adjust the MCLR?

    • Deepesh Raghaw says:

      Banks are unlikely to change spread.However, technically, there is provision to let them change spread.
      Yes, you might get locked at a higher spread.
      Bank branch officials will mostly be clueless about it.
      You can mark an e-mail to SBI Chairman. You might just get an answer.

  71. Suresh says:

    Dear Deepesh.

    I have taken 20.6 lacs home loan in Axis bank in Arpil 2015 , current loan balance is 1840000/- and balance tenure is 131months ( Original 152months–20months paid)@ Rs 22376 per month(EMI).
    Current base rate is 9.35%. Please clarify the below points

    1) If I pay part payment about 3 Lacs ,which is the better option to choose reducing tenure or EMI ( current EMI 22376/-)

    3) Is there any option to change the bank as SBI is giving customers lower interest rate 8.65%

    Looking forward your advise

    • Deepesh Raghaw says:

      Dear Suresh,
      1. Think it is a personal preference. I prefer reducing the tenor. Unless cash flows are stretched, go with reduction in tenor.
      2. Yes, you can take a home loan transfer (unless your loan agreement prohibits you in prepaying loan too soon). Check your home loan agreement for the same. If the agreement permits, contact nearest SBI branch.

  72. DEBASHIS says:

    Home Loan availed from Bank of Baroda. Current loan outstanding is Rs.6.88 lakh the tenure outstanding is 69 months approx. Present EMI is Rs 13080. Current base Rate is 9.60% while the MCLR from 07.01.2017 is 8.65% for 5 year tenure.
    Is it advisable to switch to MCLR. Please advice.

    • Deepesh Raghaw says:

      Dear Debashis,
      MCLR is not for 5-year tenor.
      If there is no charge for switching, it may make sense to switch to MCLR.

  73. shyamsunder Deshpande says:

    HI Deepesh,

    My name is shyamsunder and I have taken a Home loan from SBI in Oct. 2016 with 9.25% Interest rate.

    Now in Jan 2017 SBI’s Loan rates are 8.6% for women and I have asked my branch manager to suggest if I should convert it with new Interest rates as my wife is also a Co- applicant in the loan application, so she said me that my interest rates will automatically will get converted to the lower one after one year.

    Could you please confirm if this information is right?

    • Deepesh Raghaw says:

      Yes Shyamsunder. Since you are on MCLR, your home loan rate will automatically come down in October 2017 (or rather your MCLR will automatically change in October 2017). Your loan interest rate will be Prevailing MCLR (in October 2017) + spread.

      • Anonymous says:

        Many thanks Deepesh….
        Your quick response is much appreciated….

        Wish you a very happy new year and many more……

        • Deepesh Raghaw says:

          You are welcome. Please do share the post with your friends.
          A very happy new year to you too. Have a great year ahead.

  74. Pankaj Kherwasiya says:

    Hi Deepesh,

    Superb article,

    My SBI maxgain o/s amount is 22L and balance tenure is 16 yr, this is old loan under Base rate lending, present ROI is 9.45%

    also took home loan top up of 7.50 L, balance tenure is 12 yr, ROI 10.55%

    recently I have received 10 L, which I am keeping in max gain a/c

    Im planning to close top up loan and planning to shift to mclr Base rate @ 8.80, with fees of Rs 12000/-

    Need you are advise, also want to know can I shift top up loan under mclr rate??

    • Deepesh Raghaw says:

      Hi Pankaj,

      Difficult for me to comment about terms and conditions of top up loan. Please consult with your bank.
      With a difference of 0.65%, it may make sense to convert to MCLR for your home loan.

  75. V Nanthakumar says:

    Dear Deepesh.
    I Have taken a take over loan for 20 years for Rs.21,50,000 from SBI on 30th Sep 2015 with Int. rate 9.35%. I have prepaid then and there and now My loan outstanding balance is 17,57,000. Few Days ago, the SBI reset the Int.rate to 9.30% for my loan. And I came to know that the SBI brings MCLR+spread to 8.65% with effect from 01.01.2017. It says the MCLR+spread is for one year and the existing customers can switch over to current MCLR by paying the fees 0.50% + service tax on Outstanding Balance.
    Shall I convert the Int.rate from Base rate to MCLR?

    • Deepesh Raghaw says:

      Dear Nanthakumar,
      The difference is 0.7%, which is quite a bit.
      You should consider switching.
      Please appreciate the limitations of my analysis as mentioned in the post.

  76. V Nanthakumar says:

    And I am planing to close my loan account in 5 years

  77. P yogesh says:

    Hi Deepesh,
    please help me out.
    i have take SBI (maxgain) home loan FOR 3814000/- @ 10.15% for period of 25 year and paying EMI Rs 34928/- on since june 2013.
    now at present day loan acc shows balance loan amount Rs.3734000/- current interest rate is 9.35% (wife is first applicant).
    SBI says switch over fees to MCLR is 0.58% of loan amount.
    can you elaborate how will it benefit me if i opt for MCLR.
    hope info is sufficient for you if you required any i will provide you. for me its difficult to understand terminology used in calculations.
    awating for your response.
    regards,
    P. Yogesh

    • Deepesh Raghaw says:

      Dear Yogesh,
      For elaborate explanation, you will have to work out the numbers yourself.
      As I understand, your outstanding term will be ~230 months (at current rate and emi).
      At revised rate of 8.65%, you loan will finish in 205 emi.
      Significant savings for a cost of Rs 18,000 upfront.
      Think you can switch.
      However, do appreciate the limitations of my analysis (as provided in last para of the post)

  78. Ronak Lathia says:

    Hello Deepesh,

    Very nicely explained.Liked it very much..

    My question:I took loan of 16L on OCT’16 for 15 years @9.35% from SBI(MCLR with one year reset period).

    Now that MCLR rate has been reduced,how can I take benefit?

    Do I have to wait for one year or to switch to the other bank?

    • Deepesh Raghaw says:

      Dear Ronak,
      Thanks Ronak. Do share the post with your friends.
      You will get benefit of lower MCLR from October 2017. Suggest you wait till that time.
      You have already locked in a lower spread. As I understand, banks cannot change spread so easily.
      In my opinion, it is not worth shifting to another bank.
      The problem you have facing at SBI , you will face at another bank too.
      MCLR has reset period and it is there with all the banks. Other banks may have a lower reset period though.

  79. Samadhan Deshmukh says:

    Hello Deepesh,

    I availed SBI Maxgain HL in Feb 2015 at interest rate of Base Rate + 0.05%.
    Current interest rate is 9.25+0.05=9.30 %.
    If I change to MCLR the interest rate will be 8.80%. (Difference of 0.5 %)
    Current outstanding loan balance is Approximately 25, 21,000/-
    Remaining Tenur is Approx. 17.5 Years.
    Is it worth change to MCLR?
    Please let me know your views.
    Thanking you in advance.

    • Deepesh Raghaw says:

      Difference of 0.5% is quite big. Makes sense to switch.
      However, please appreciate the limitations of my analysis.
      Additionally, please note that you are locking in a bigger spread.

      • Samadhan Deshmukh says:

        Thank You for your view and prompt reply..I think I should wait for some more time so that Bank may reduce its spread..Thanks again..

  80. Abhishek Pareek says:

    Hi Deepesh,

    I have a loan from SBI (around 36 Lac) at 9.4% (base rate) . I enquired about switching to MCLR, they will charge around 16500 Rs and switch to MCLR rate of 8.8%. Please suggest if I can switch?

    • Deepesh Raghaw says:

      Hi Abhishek,

      Your loan amount is quite high. Will make sense to shift to a lower rate.
      However, please appreciate the limitations of my analysis (as mentioned in my post).

  81. ranjit says:

    Hi Deepesh
    I have two loan from LICHFL.
    (i)
    Loan amount 16 lacs
    R.O.I= 11.7%
    Term= 20 yrs
    loan sanctioned/disbursed year= 2008
    (ii)
    Loan amount 12 lacs
    R.O.I= 11.45%
    Term= 18 yrs
    loan sanctioned/disbursed year= 2013
    Could it make sense to shift to MCLR or loan a/c change to SBI.
    Regards
    Ranjit

  82. Kiran S says:

    Currently –
    SBI max gain ,
    base rate + spread of 9.25 , Drawing power 63L , but remaining to be paid is 53L.

    EMI = 63K per Month , at 9.25%, will complete loan in 11 years 4 months

    I switch to MCLR – fee is 0.58% of Drawing power = 0.58% of 63L = 36K spent NOW

    EMI = 63K per Month, at 8.65%, will complete loan in 10 years 10 months

    6 months saving = 63000 * 6 = 378000 after 10 years ——————(1)
    Value of 36000 spent now in 10 years at 7% inflation = 72000 ————(2)

    (1) – (2) = Rs 3L saving after 10 years, or effectively 1.5L saving now [7% inflation]

    I will go for the change, unless I have missed any other datapoint

    Is there any other data point I need to consider Deepesh?

  83. Skiran says:

    Loan: MAXGAIN
    Book Balance:-38,16,693.14
    Available Balance:13,48,129.86
    Limit:51,64,823.00
    Drawing Power:51,64,823.00
    Rate of Interest (% p.a.):9.5%

    my question is, if I switch to MCLR will the .58% calculated on Book Balance or Drawing power.Also,I am planning to pay off my loan in 5years.Should I keep mt existing loan interest rate or switch to MCLR?
    Please let me know

    • Deepesh Raghaw says:

      You will have to check with the bank.
      From what I understand based on the queries received, it is on the principal outstanding.
      What is the MCLR rate that you have been offered?

  84. vaibhavlonde63@gmail.com says:

    I have taken sbi maxgain home loan of Rs. 20,40,000 in Oct. 2013. At that time the rate of interest is 10.10. At present the balance amount is 1700000. The rate of interest on 31st Dec. 2016 is 9.55. But on 2nd Jan sbi send the message the rate of interest is 9.50 But in all the news the rate of interest is reduce by.9 But my rate of intrest is recued only by 0.05 The what is process to make my rate of interest with the current rate, I want to complete the all the balance loan in next 7 years. Plz guide

    • Deepesh Raghaw says:

      Your loan is on base rate, which has not changed much (by only 0.05%).
      You can talk to your bank branch. You can convert to MCLR by paying a fee.
      Contact your branch for more details.

      • vabhavlondhe says:

        Hi sir as the bank give me the mclr rate is 8.8 and they demand the charge is11500/- for tconvert base rate to mclr. Is should I shift to mclr or not pplz guide

        • Deepesh Raghaw says:

          Dear Vaibhav,
          If you do analysis as per my calculations, switch will be a good choice.
          However, do appreciate the limitations of my analysis.
          The timing and quantum of prepayment will also be crucial. I have not considered that.

  85. Pankaj says:

    Hi, I took a home loan from Union Bank of India at 10.25 percent in the year 2014, for 21 years and EMI payable as 19374. During the course of these two years, the interest rate has come down to 9.55%. I have managed to prepay the loan and now the outstanding is 15 lacks. I spoke to the bank manager to reduce the tenure but he said that there is no need to reduce the tenure as the interest rate paid is dependent on the outstanding balance and is not affected by the tenure. What he meant was that whether the tenure is 21 years or 15 years, it doesn’t matter as I pay the interest on the outstanding balance. It doesn’t seem right to me. The second question is that the bank manager didn’t talk about any fee and he just said something about stamp papers to convert it into mclr.

    Question 1: Is the bank manager correct in saying that I shouldn’t be bothered about tenure as the interest rate charged is dependent on outstanding balance and not on tenure. Is it OK for me to continue paying double the emi every month without getting the tenure shorter? Or do I tell the Bank to reduce the tenure?
    Q2: Do I go ahead with the MCLR rughtaway or do I wait for some note time as I think that home loan rates will go further down?

    • Deepesh Raghaw says:

      Hi Pankaj,

      1. The bank manager is right in saying that there is no need to change tenure. It is automatically taken care off. Yes, you can continue making prepayment. Tenure will adjust automatically.
      2. Your guess is as good as mine. Check the process and cost of switching before making a decision.

      • Anonymous says:

        Thanks for answering question one. The only reason I feel that I should ask the bank to reduce the tenure of my home loan is because the interest portion of the emi(after making prepayments) would be calculated basis 21 years instead of 15 years and if that is the case than I am paying more interest to the bank than what I would pay if the tenure is shorter. Please help me with this and please tell me that I am wrong.

        • Anonymous says:

          To explain to you my understanding, the outstanding balance of 15 lacks would be converted into emi and the emi would have interest portion according to 21 years( which will be higher). If the tenure is shorter, then emi portion will have lesser interest. Hence I thought that I should also ask the bank to reduce the tenure instead of just prepaying and that is why I felt that what the manager is saying isn’t totally correct. I don’t know how the loan function works but just wanted to clear my understanding. Would be glad if you can explain how the prepayment function works and also if it is solely dependent on the outstanding balance irrespective of the tenure.

          • Deepesh Raghaw says:

            Suppose you O/s loan amount is Rs 13 lacs and interest rate is 10%. Let’s assume EMI is 25,000
            You prepay Rs 1 lac. This Rs 1 lac gets deducted from outstanding principal. Hence, the new principal outstanding is Rs 12 lacs.
            Nect month, interest will be calculated on outstanding principal i.e. Rs 11 lacs.
            Rs 12 lacs X 10% * 1/12 (for 1 month)= Rs 10,000.
            From your EMI of Rs 25,000, Rs 10,000 will go for interest payment and the remaining Rs 15,000 will go towards principal repayment.
            Hence, principal outstanding now becomes RS 11.85 lacs.
            And this cycle continues.
            Hope this clarifies emi calculations.

  86. NITIN DOGRA says:

    Sir
    Need advice, My home loan is passed in March 2016 ( Rs.45/- lac) on base rate of 9.30% + 0.25% of margin money . It is construction link plan( SBI MAX GAIN). Total amount release till date is 25 lac, having a tenure of 20 years.
    Should I switch to MCLR, they are charging 0.4% on outstanding amount + service tax.
    I have plan to pre-pay the same in 15 years in future.

    Please advice.

  87. Ashutosh Verma says:

    Hi Deepesh,
    I took a home loan of Rs 30L from Central bank of India around 3 years back. Today, when I visit bank branch (Ghaziabad) to switch into MCLR then manager informed me that this switch is available only for the new customers and the recent loans (1-APR-2016 afterward). I am confused if this depend on the WILL of bank to switch or not. I am ready to pay processing charge but bank is not ready.

  88. Dama Rath says:

    Hi Deepesh,

    I have home loan from SBI(MaxGain) taken on 22nd-Jan-2014 and My EMI is 53,000/-Per month . Interest rate applicable to me is 9.35 now. My outstanding amount is 21 lac.

    Seeing the posts of others I believe if I convert my loan from Base rate to MCLR then I have to pay approx 12k rupees. I am fine to pay this amount to convert myself from base rate to MCLR.

    However What I see from the various posts here, Once I covert to MCLR lets say on 1ST-Feb-2016 then if SBI does a rate cut next day, I have to wait for 6 months or 1 year as per reset period.

    So is it good to convert from base to MCLR for me? As I expect there might be few more rate cuts in this year as well, seeing the current market scenario.

    Also I want to understand from you, if I don’t convert my loan from base to MCLR, Does it mean my interest rate will never come down in years to come?

    I also aim to close my loan within next 3 years. Please advise whether I should switch to MCLR or not if you would have been in my position.

    Thank You

    • Deepesh Raghaw says:

      Hi Dama,

      Yes, you will have to wait till the next reset period (before your interest rate is adjusted downwards).
      However, you cannot be sure if SBI will pass the entire cut to you. They may cut MCLR and increase spread (as they did this time). Difficult for me to comment what SBI will do.
      Base rate will also go down. However, you can expect the cuts to be slower in case of base rates.
      Prepayment reduces the benefit of switching to a lower rate.

  89. sabyasachi samanta says:

    I have availed housing loan of Rs 12,00,000 from IDBI Bank Limited. right now i want to chenge base from base rate to MCLR, for this time can I Change the EMI Facility and how to procedeor?

    • Deepesh Raghaw says:

      Banks are providing the option to base rate borrowers to switch to MCLR by paying a fee. Suggest you talk to your bank.

  90. Sachin says:

    I have taken SBI Maxgain Home Loan in Jan 2013 for 20 Years, Presently My outstnding is 45lacs. In case of Base rate regime, base rate cange as bank change it but spread will remain fixed over the tenure. What about MCLR+spread? Will spread remain constant OR it will be changed after 1 year period?

    • Deepesh Raghaw says:

      Dear Sachin,
      Does your loan agreement have any provision for change of spread?
      If the spread is hardcoded and there is no provision to change it, it is constant.
      Even otherwise, it is not easy for the bank to change MCLR spread.
      Hence, spread is quite likely constant.

  91. Sachin says:

    So, I have to wait for switch till minimum spread becoz present .75% is quite high spread.

  92. Suresh Sharma says:

    Thanks for your comments, guidance.
    Please also help me. I have taken home loan of Rs.18 lakhs from Bank of Baroda at fixed rate in January 2015 to be repaid in equated EMI of Rs.22699/- in 11 years. I am a govt servant.

    Now bank has asked my consent to switch over to MCLR system. I am planning to repay loan before March 2021.

    Kindly advice me.
    Regards

  93. Suresh Sharma says:

    I forgot to mention my name. Total loan period is 11 years. Tenor is 9 years. EMI @ Rs.22699/- for 133 years, total amount to be repaid in 11 years = Rs.3018967/-. Till December 16, I have repaid Rs.5,22,000.

    • Deepesh Raghaw says:

      In absence of any switch fee, switch to MCLR. I assume rate MCLR linked loan is lower than the base rate loan.

  94. Madhav says:

    Hi Deepesh,
    Recently i have switch my loan from Base rate to MCLR in Central bank of India. They charged me 0.50 fee + Service tax.
    I wanted to ask you about spread. In 2014 i have taken loan with (Base Rate + 0 spread) and while migrating to MCLR CBOI charge me (1year MCLR + 0 spread). (old rate 9.70/ New Rate 8.50)
    Do bank have right to change my spread future? and In which scenario they can change spread?

    • Deepesh Raghaw says:

      Hi Madhav,
      Spread will most likely stay constant. Banks can’t change spread that easily for the existing borrowers. Full risk profiling needs to be done. Doubt banks will go to that extent.
      Suggest you go through the loan document and see if there is scope for changing the spread.

      • Madhav says:

        Thanks Deepesh, Why i was asking because recently SBI change from 20 bps to 60 bps so thought to check with you.
        Just one more think post MCLR Migration do i need to approach bank for new Loan documents? As such they have not issues any thing to me but in Netbanking i can see the new rate. Please advise

        • Deepesh Raghaw says:

          You are welcome, Madhav.
          The increase in spread was for the new borrowers. not the existing borrowers.
          Please contact the bank for such operational queries.

  95. Suresh Sharma says:

    Thanking you Deepesh ‘G’. You are providing useful help. Good work dear. God Bless you….. Ameen !

  96. Sidharth says:

    Hi,

    Will change to MLCR rate from base rate reduce the EMI or the tenure of the loan? Is there a choice to borrower to choose form the two options?

    • Deepesh Raghaw says:

      The default option is that the EMI stays constant and loan tenure changes.
      There is also an option to change emi and keep tenure constant.
      Check your loan agreement and talk to your bank.

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