April 1st, 2016 marked a major change in the way banks and NBFCs grant home loans to applicants. The Prime Lending Rate (PLR), which earlier decided how lenders grant loans, was replaced by Marginal Cost of funds Lending Rate (MCLR). This led to a decrease in the interest rates for Home Loans.
Banks and NBFCs now decide the final lending rate by considering the marginal cost for borrowing of funds by the banks. For borrowers having a loan with a fixed interest rate and for those who applied for loans before April 1, 2016, this revision from PLR to MCLR and the associated reduction in the interest rates are not applicable.
Every change in the MCLR does not result in a reduction of interest rates for home loans- lenders can change/reset the clause in the lending agreement. Generally, there is a spread charged by the lender as premium over the MCLR.
Additional Read: How current reduction in lending rates affects Home Loan rates
Individuals can switch from PLR to MCLR by:
-Paying the applicable charges to the bank/NBFC
-Switching lenders through a home loan balance transfer
Switching lenders is feasible when your loan repayment tenure is in its initial stages and when there is a significant difference in the interest rate offered by the new lender. After paying the balance transfer charges applicable, you can move from a higher interest rate home loan under PLR to a lower interest rate home loan (under MCLR).
Aman Khanna is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has an MBA in finance from Toronto University as well as years of experience delivering seminars on sound financial practices and debt management.