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Why MCLR linked home loans fail to reduce your EMIs

You have to wait out the reset period, which varies from three months to one year, to enjoy the benefits of the MCLR cut.

August 20, 2019 / 09:14 AM IST

 Will I get the benefits of a rate cut? Would my EMIs (equated monthly instalments) reduce? These questions get played almost on a loop each time the Reserve Bank of India (RBI) slashes interest rates. The RBI on its part has cut rates by 110 basis points so far this year.

But, as always, banks have been reluctant to pass on lower rates to borrowers, and even when they did, the gains to borrowers have been meagre. Recently, State Bank of India (SBI), Bank of Baroda, Central Bank of India, Allahabad Bank, UCO Bank, Syndicate Bank, etc. slashed their marginal cost of funds based lending rate (MCLR) rates by 5 to 25 basis points for different tenors after the RBI slashed rates by 35 basis points (bps) in August. One basis point is equal to one hundredth part of one per cent.

However, it’s important to know you may not gain from it any time soon, at least not in any significant manner. So, have MCLR loans failed borrowers? Here are some commonly misunderstood aspects about rate cuts and when they are passed on to borrowers.

Interest rates will be reduced immediately after MCLR cut