First of all before going into the letter that now many banks are sending to their retail borrowers of switching to the new MCLR or marginal cost of funds based lending rate. We will here detail about the new rate regime, the MCLR system of establishing interest rates for borrowers was introduced after there was seen a lag in the transmission of key policy rates. This said we mean at many a instances when the government raised repo rates or the rate at which RBI lends to banks, banks raised base rate charged to borrowers at the same degree but when at some of the occasions rates saw a downward trajectory, there was seen a considerable lag.
To offset this issue, the MCLR regime came into force in the year 2016 and now still a majority of the loan rates are pegged to the base rate and RBI is constantly raising concerns to harmonise linking the Base Rate to the MCLR with effect from April 1, 2018.
So, now the question that comes up is during the current times when the interest rates are traversing on the higher side, should you make the switch right away or wait for some time.
Here's the answer as per experts:
In general retail borrowers are in receipt of such an offer letter which goes like this " you can switch from current system of floating reference rate to MCLR rate, with no change in effective rate of interest. No switch fee will be charged.
So, if you have some long term borrowings such as home loan and other debt on floating rate, below is the best suggested way out for you:
MCLR rate is a more transparent mechanism for customers and this pricing shall be better for borrowers. But instead of switching right away, borrowers can wait until the interest rate regime narrows a bit from the current higher side. It is because the benchmark rates are linked or aligned to the MCLR rate and the customers following such a regime will more likely benefit at a faster rate in comparison to other rate systems.
Hence, the switching should be made when the rates traverse down as any rate increase will mean a straight burden on consumers in respect of interest payment. As when the rates increase, banks increase the home loan tenure.
Also, when switching to the MCLR regime it is to be noted that the reset frequency should be 12 months or lower. Another thing to keep in mind is about the fixed rate of loans being offered by banks but such loan options come with the disadvantage of steep charges when it comes to foreclosing a loan. Also, in a case when you want to switch to a lender with a cheaper rate, you may not be able to do so easily.