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MCLR and RRLR: Which One to Choose?

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If you’re buying a house and taking a Kotak Home Loan to fund it, your first priority is to find a lender that offers a reduced home loan interest rate. After all, a lower home loan interest rate often correlates to reduced EMIs, and hence allows you to repay your home loan faster.


Furthermore, it reduces the overall amount of interest paid on your home loan. Lenders will often give you one of two loan types: MCLR-based home loans or RRLR-based home loans. What is the RLLR rate and how do they differ from one another? More importantly, how do you choose wisely? And, how do they affect your Kotak Home Loan interest rate? Continue to read to find out.


Before we move ahead and talk about the difference between repo rate and MCLR, you must first understand a few key phrases. 


Spread: The spread is the difference between the interest rate the bank charges its lenders and the interest rate it pays its customers. This is expected to have a significant impact on the bank’s profits.


Repo rate: The repo rate is the rate at which commercial banks borrow money from the RBI to meet their different obligations. The repo rate is the interest rate at which the RBI loans to such a commercial bank.


What is the MCLR interest rate?


The MCLR, or Marginal Cost of Funds Based Lending Rate, is the lowest interest rate that a lender can give. It normally takes into account elements such as your loan tenure, the repo rate (the rate at which commercial banks borrow money from the RBI), the Marginal Cost of Fund, the Cash Reserve Ratio, the Tenor Premium, the Operating Costs, and so on.


This means that if you choose an MCLR-based Kotak Home Loan with a floating interest rate, the loan interest rate will fluctuate depending on the current repo rate and other factors. Furthermore, these adjustments take effect after a predetermined time period known as a reset period, which might range from 6 months to a year.


So, as a borrower, why should you choose an MCLR interest rate? As repo rate is considered while computing the marginal cost of funds, the MCLR rate is lower than the base rate of interest offered by most lenders. As a result, they are an excellent option for lowering your home loan interest rate.


What is the RLLR rate or Repo Linked Loan Rate?


It is a lending rate that is linked to the repo rate. However, additional criteria that influence the RLLR include the loan-to-value ratio, the borrower’s risk, and others. Simply said, as the repo rate rises, so does the RLLR, and vice versa. Furthermore, the RRLR changes immediately as and when the repo rate changes.


Important Features of MCLR and RRLR


  1. Benchmark linkage: Kotak MCLR has internal linking, which means lenders decide after taking into account their own costs. This type of rate is not primarily determined by the repo rate.


The repo-linked loan rate is externally linked, which means that when the repo rate changes, the interest rate adjusts instantaneously. Lenders or financial institutions can only set their markups, but repo-linked lending rates are only determined by the repo rate.


  1. Reset time: Kotak MCLR rates are routinely revised every 6-12 months by lenders. This means that even if the interest rate changes, you will only benefit from it after the 6-12 month term. In the case of repo-linked lending rate loans, interest rates are altered every three months, which affects your EMIs.


  1. Rate of transmission: Kotak MCLR interest rates have a longer waiting period, which means they fluctuate more slowly. This allows you, the borrower, to respond to fluctuations in interest rates and acquire the necessary finance. Repo-related lending rates, on the other hand, fluctuate rapidly. This implies that changes in interest rates are reflected instantly in your loan EMIs.


The final-Which choice should you make?


Choosing between the two types of interests will be based on a variety of personal factors that you must measure, examine, and decide on. You may be able to determine which is superior based on some comparisons we have listed down below:


  1. Accountability: The Kotak MCLR rate and its calculation are an internal matter for a lender. As a result, you may find it challenging to comprehend the precise causes behind a given interest rate. In contrast, everyone has access to the repo-linked loan rate. They are, of course, the preferable option if you value interest rate transparency.


  1. Stability: In terms of stability, Kotak MCLR loan rates are preferable. Why? Because repo-linked interest rates fluctuate with each change in the repo rate, it is difficult for borrowers to plan for finances in the event of a rate hike. In contrast, MCLR loan rates move slowly. As a result, you have more time to plan your finances in the unlikely event that interest rates rise considerably.


  1. Financial saving: Because home loans come with long tenure, it is best to secure a loan with a low-interest rate to maximize savings. And the easiest way to do this is to use a repo-linked interest rate. When you choose a Kotak Home Loan with a repo rate linked interest rate, your interest rate falls dramatically when the repo rate falls. This means you’ll have to pay lower EMIs. In contrast, a drop in repo rates may have no effect on your MCLR rate-dependent home loans. If you want to save money on loan interest, repo-linked loan lending rates are the logical choice.


At last, 

It is expected that repo rate-linked home loans will result in the speedier transmission of rate changes, better transparency, and an improvement in the Indian economy’s liquidity status. However, before switching from MCLR to RLLR or from one bank to another with differing RLLRs, consider the following:

Compare current home interest rates to new ones. The RLLR regime should result in lower Kotak Home Loan interest rates than the existing MCLR system.

Even if the difference between the old and new interest rates is only 20-25 basis points, switching from MCLR to RLLR makes sense if the principal outstanding is large.


Before migrating from one bank to another under the RLLR regime, compare rates and other parameters such as margin and spread. If a bank’s margin is bigger despite having a lower RLLR, the total savings will be reduced, therefore it is best not to switch to this bank in this case.


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