Which Home Loan Interest Rate is Better: RLLR or MCLR?
A home loan is most likely the biggest investment that an individual undertakes in their life. As such, it’s important to know the different ways in which you can make the loan repayment easier by making sure you’ve got the lowest interest possible. If you’re getting a home loan, then you have two options. You can either choose from Repo Linked Loan Rate (RLLR) or you can go for the Marginal Cost of Funds based Lending Rate (MCLR).
What is MCLR?
MCLR refers to a tenor-linked internal benchmark that regulates the interest rate of retail loans such as home loans. It can be defined as the minimum rate at which a loan is provided by financial institutions to its customers. Banks cannot go below the MCLR rate or else they can face regulatory actions.
This rate was introduced for increasing the average revenue made by banks. However, they can do it with prior authorization from the RBI. MCLR is estimated by a bank based on four crucial components: Operating Costs, Tenure Premium, Cash Reserve Ratio (CRR), and Marginal Cost of Funds.
What is RLLR?
RLLR involves the use of an external benchmark such as the RBI’s repo rate. Commercial banks use this rate to evaluate the home loan interest rate. If the repo rate is slashed by RBI from 5.75% to 5.40%, then RLLR of all banks using RBI’s repo rate as a benchmark will be lowered by 35 basis points. This translates to lower interest rates.
Difference between RRLR vs. MCLR
|Reset Period||3 months||6-12 months based on the bank|
|Benchmark Link||RBI Repo Rate (External Mechanism)||Internal Mechanism|
MCLR is more of an internal benchmark for a bank and its cost of funds will influence the MCLR rate for a particular bank. RLLR is externally linked and the bank’s cost of funds has no direct influence on the repo rates. RLLR is dependent on the RBI’s repo rate and fluctuates with revisions made to it by the RBI. If the Repo rate is slashed, then the banks using it have to cut the home loan rates and vice versa.
In the MCLR-linked home loan, the reset period is about 12 months. However, a few banks have introduced a 6-month period as well. No matter what the reset period is, the interest rate over the loan gets revived with it. However, in the case of RLLR loans, the interest rate, and hence the EMI is set for a minimum of three months.
When we consider MCLR loans, banks can charge a margin, mark-up, or spread, for instance, if MCLR is 8.6% for a bank, it can lend at 9% by factoring in 40 basis points of mark-up. However, in the case of RLLR, the spread is according to the loan amount and the category to which the borrower falls.
As per the guidelines issued by the RBI, RLLR-linked interest rates are subject to revision once in three months. Any change in repo rate will be reflected in the RLLR of commercial institutions once in every 3 months. On the other hand, MCLR-based loans are revised once in six or twelve months. This implies that the volatility linked to RLLR is more when compared to MCLR.
How Much Can You Save with RLLR-linked Loans?
Let us consider an example of a home loan of ₹35 lakh offered by SBI. Let us take the loan tenure to be 12 years, MCLR as 7%, and RLLR as 6.25% as per the current revisions. This table makes the difference in EMIs quite clear.
|Factors||MCLR-linked Home Loan||RLLR-linked Home Loan|
|Total Interest Amount||₹16,83,041||₹14,83,737|
|Total Amount Paid Over Loan Term||₹51,83,041||₹49,83,737|
It is quite evident from the above example that the total interest expenses are lowered significantly in an RLLR-linked home loan if we compare it with MCLR-based home loans. Even the monthly interest is lower by ₹1,384 and you save ₹1,99,304 in total over the total interest amount paid for the loan. The amount that you save can be used for investment in either a fixed deposit or mutual fund or to meet any other financial requirement of yours.
It is quite clear that based on the current scenario, RLLR-based home loans can save you a lot of money over the interest amount that you pay. This is because it is linked to an external parameter that is subject to change every three months which is not the case with MCLR-based home loan. You can weigh both the options to make an educated choice while choosing home loans.