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Home Loan: Switched to repo rate ?

RBI introduced MCLR (Marginal Cost of Funds Based Lending Rate ) as a standard index in 2016 for transparency in intrest rates. Whenever the RBI revises the interest rates, it has been brought in so that the benefit can be transferred to the borrowers faster. Banks decide this MCLR on the basis of the costs incurred in mobilizing deposits. This interest rate is fixed ffor a period of one day to three years. This interest rate is fixed for a period of one day to three years. This MCLR determines the minimum interest rate at which banks will lend. Almost all banks have started increasing their MCLR early from the 1 st of this month with the expectation that RBI will once again increase the repo rate. Apart from this, home loan companies have also increased their standard rate by 25 basis points. Banks have increased interest rates by around 10-25 percent. Till October 2019, banks issued home loans only under MCLR system. After that RBI stated that repo should be considered as the standard interest rate. Now repo based interest rates (RLLR) are available.

Interest rates were very low till some time ago. But, RBI started increasing the repo rate to control rising inflation. This interest rate, which has already increased by 90 basis points, is expected to increase by another 25-35 basis points. However, repo based interest rates are likely to remain low as compared to MCLR.

In this background if your home loan is still continuing in MCLR, try to convert it to RLLR immediately. For this, find out how the bank is charging the interest rate for you loan. What is the current interest rate burden? Calculate the change in the new repo-based interest rate. Based on this, it will be known whether to switch to the repo rate or to continue with the MCLR. If switching to repo will reduce the interest burden or duration. Inform the bank about it. Some banks have already shifted their borrowers to repo rate. Those who want to switch are asked to pay a processing fee of about half percent of the original amount. RBI’s decision today is likely to increase your home loan rate. Be prepared for this.

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