14 DECEMBER, 2021

Congratulations, if you have finally planned to buy your dream home. Since the property prices are high, you might have decided to take a home loan to make this dream a reality. However, there are a few technical aspects of a home loan that can confuse you, for example, the determinants of your home loan interest rates.

Home loan lenders can offer you a home loan with either Repo Linked Loan Rate (RLLR) or Marginal Cost of Fund Based Lending Rate (MCLR). You must have thorough knowledge about these two terms before you apply, to understand your home loan better.

What is Repo Linked Loan Rate (RLLR)?

As the name suggests, RLLR is linked to or is based on the Repo rate set by RBI and is revised from time to time. All the banks have different RLLR. The RLLR is changed every time the repo rate changes.

What is the Marginal Cost of Fund Based Lending Rate (MCLR)?

It is the rate below which a bank cannot charge its customers. It is set by the bank adhering to the guidelines set by the RBI for it. It is usually revised half-yearly or on an annual basis.

Difference between RLLR v/s MCLR

Benchmark Linking

In RLLR: It’s an external benchmark linked to RBI’s Repo Rate. This means that if there’s a change in the repo rate by RBI, it would also affect your home loan interest rate. There is greater standardization and transparency for borrowers in such interest rates.

In MCLR:It’s an internal benchmarking where the bank sets its interest rate considering its own cost of funds. The repo rate is not the only factor affecting the interest rate, but other factors like banking system liquidity, low-cost deposits, etc., also come into play.

Reset Period

In RLLR:The reset period in RLLR is three months which means that your EMI can be subjected to revisions every three months. This is beneficial because borrowers can enjoy the repo rate cut through lower EMIs. However, if the repo rates escalate, a similar impact will be seen on the EMI payouts as well. .

In MCLR:The reset period is usually six months or a year. Hence, banks may choose to revise their interest rates every half-yearly or annually. This gives borrowers a good time lag before every change in their EMIs.

Transmission Rate

In RLLR: The change in rate cuts by RBI is transferred to the borrowers in a fast and quick manner.

In MCLR:The transmission of the rate cuts are relatively slow, and it usually takes time before actual benefit is finally transferred to the borrower.

In a nutshell

With RLLR, you can enjoy more transparency and expect to benefit from repo rate reduction quickly. MCLR, on the other hand, is a more stable option if you estimate the repo rate to rise. It would be best to consider the difference between the two and then assess which would be best for you.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.