You might need to shell out more for your home loan EMI, as the Reserve Bank of India (RBI) has linked the base rate to marginal cost of funds-based lending rate (MCLR), with effect from April 1, 2018. Currently, all new loans, which are sanctioned after April 1, 2016, are linked with MCLR. The loans sanctioned before April 1, 2016, are linked with the base rate. Banks calculate the base rate on the basis of the average cost of funds. MCLR is calculated on the basis of the incremental cost of funds.

MCLR was implemented as the new interest rate regime was considered more sensitive to policy changes compared with the base rate method. It was introduced as it was noticed that banks were not transferring the entire benefit to borrowers despite the frequent repo rate cuts by RBI.

This is a bad news for home loan borrowers who are on base rate, as banks would start transmitting higher rates to them with the likely reversal in interest rate cycle. Considering that base rate is less volatile many borrowers might have decided to keep their home loan linked to base rate.

RBI has reduced repo rate by 2 percentage points in the last two years. Contrary to this the base rate has reduced by just 80 basis points. Similarly, till December 2017, MCLR went down by 1.15 percent against the decrease of 75 basis point in repo rate.

With a likely increase in interest rates, now the lending rate on their home loan is also likely to go up frequently. Though RBI is likely to keep the repo rate unchanged on April 5, after monetary policy review, in the long term it is likely to go up. Abheek Barua, Chief Economist, HDFC Bank, says, “The RBI is likely to stay hawkish on account of two factors. One, there could be caution related to higher Minimum support prices (MSPs) that the government could offer to farmers in line with its budget ‘commitment’ and because of surging oil prices. Second, core inflation has become more broad-based and is markedly high for categories like services. Increase in components of salaries (like housing allowance) due for employees of the state governments could add to these pressures.”

What does it mean for the borrower? Pankaj Mathpal, managing director, Optima Money Managers, says, “Banks offer floating rate loan and rate changes several times during the term of the loan. Hence, it makes not make much difference whether rates are high or low at the commencement of the loan. What matters most is the average borrowing cost. Having said that, a higher lending rate at commencement does impact borrower’s eligibility for the loan as most banks calculate the loan eligibility based on the present EMI.”

Recently, State Bank of India, India’s largest bank by assets, increased its base rate by 5 bps with effect from April 1, 2018. The base rate of SBI is now at 8.70% per annum compared with the earlier rate of 8.65 percent. It is not just SBI, other banks have been increasing the rates, too. For example, HDFC Bank has increased its marginal cost of lending rate (MCLR) for one year by 10 basis points to 8.3 percent. The six-month MCLR has jumped up by 15 bps to 8.15%. ICICI Bank also raised its one-year MCLR to 8.30% from 8.20% earlier. Similarly, PNB has increased its one year MCLR rate to 8.30% from 8.15%.