To maintain transparency for consumers while borrowing, loans are given basis certain benchmarks. The lending measures for all loans, including Home Loans are taken on the basis of the said benchmark rates. These rates are different for different banks and for non-banking finance corporations.

Three major rates to keep in mind are the Repo rate, the MCLR (Marginal Cost of Funds-based Lending Rate), and the Prime Lending Rate (PLR).

Breaking down repo:

A repo rate is the external benchmark basis which floating rates and retail rates are decided. Repo is short for ‘Repurchasing Option’ or ‘Repurchase Agreement’. It is the agreement between RBI and the bank, to avail overnight loans, thereby providing banks with money to run their businesses. The bank sells securities to avail the cash and the central bank purchases the security, with a guarantee that the banks will repurchase the said securities at the ‘repo’ rate. This is an external benchmark that the RBI uses to regulate the lending rates charged by banks, while re-evaluating the benchmark every two months.

What are repo-linked bank floating rates?

Banks use repo rates to determine their lending rates. To give borrowers a transparent external benchmark to assess their loan costs, RBI introduced the repo rate linked loans. These are floating interest loans where the interest rate changes basis the change in the repo rate. These floating-interest loans are called repo-link bank floating rates. Here, floating interest rates of the loans are based on the external repo rate set by the RBI. This means that an increase or decrease in the external repo rate will need the banks and lenders to adjust their repo linked lending rate correspondingly.

ICICI Bank offers floating interest Home Loans, or repo rate Home Loans, based on the same. This is calculated as Repo rate + 2.70% = 6.70%, to ensure transparency. Here 2.70% is the margin set by ICICI Bank for their best customers, and the total of the repo rate + margin will be the lowest interest rate offered by ICICI Bank.

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

Another rate to keep in mind is the MCLR or Marginal Cost of Funds based lending rate. This is an internal rate for banks, as per RBI regulation and is regulated by the RBI on a monthly basis. It has an annual reset rate under a 1-year MCLR and the Home Loan rate offered by each bank may be dependent on this rate.

PLR: Prime Lending Rate

A Prime Lending Rate is an internal reference rate set by the HFC (Housing Finance Corporations) and NBFC (Non-Banking Finance Corporations), to set up the interest rates on floating interest loans. Floating interest rates for PLR have no fixed time for review, and may change as and when the PLR changes. Currently, the PLR rate in India is calculated as an average of interest rates offered by five large banks.

Here’s a quick table to see a comparison on PLR vs Repo Rate vs MCLR

Repo Rate

PLR

MCLR

External rate

External rate

Internal Rate (as per RBI regulation)

Followed by Banks

Followed by NBFCs and HFCs

Followed by banks

Standard rate set for all, and is linked to an external benchmark.

Internal rate for NBFCs that are not monitored by regulatory bodies.

Regulated by RBI for each bank.

Reviewed by RBI every 2 months, reset rate is once in 3 months.

No fixed time for review, reset rate as and when the PLR changes.

Reviewed monthly, reset rate is annual.

When choosing a Home Loan, it’s important to know who you are borrowing from, and what rate is being charged on your Home Loan. This way, you can decide the cumulative costs and pick one that suits your budget and needs. You can check your loan eligibility here and apply for a home loan, today.

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