PROPGUIDE − A Complete Property Guide
#happyhome

An Explainer: Interest Rate Spread

Loading video...

Description

Banks’ interest rate spread is one of the many banking jargons that we often come across. In simple words, interest rate spread is the difference between the interest rate that a bank charges on its loans to private customers and the interest rate that it pays its customers on their deposits.

A bank’s interest rate spread on any loan is calculated on the basis of a number of factors, such as tenure risk, credit loss, profit requirement, operating cost, demand in the market, and specific risk assigned to an individual customer.

As a home buyer, it is important for you to know the interest rate spread involved in the home loan you take from your bank. The interest rate on your loan has two components – Marginal Cost of Funds-based Lending Rate, or MCLR, and the interest rate spread.

Until March 31, 2016, the first component was base rate, or the benchmark rate below which a bank would not lend its customers. However, in its first bi-monthly review of its monetary policy on April 5, 2016, the Reserve Bank of India replaced the base rate with MCLR.

Now, on all loans given since April 1, 2016, banks charge an interest rate that is a combination of MCLR and spread. MCLR is based on the bank’s cost of raising incremental funds and involves five or more rates depending on periodicity – such as overnight, one-month, three-month, six-month, yearly, and so on. Spread, meanwhile, is the margin for profit that the bank wants to price into its loan product.

For example, if you take a home loan of Rs 10 lakh for 20 years at the rate of 10.5 per cent, and the MCLR at a particular point of time is 8.5 per cent, the interest rate spread on the loan is two per cent. Later, if the bank revises its MCLR to 8.25 per cent but the interest rate on your loan remains unchanged at 10.5 per cent, it implies that the bank has increased its profit margin by tweaking its spread to 2.25 per cent.

Tags: interest rates, Raghuram Rajan, Reserve Bank Of India, banks, Video, propguide, Loans


Cautious RBI Leaves Rates Unchanged

The six-member monetary policy review committee, headed by RBI Governor Urjit Patel, unanimously decided to hold rates in its Sixth Bi-monthly Monetary Policy for 2016-17 on February 8.

February 08 2017

+ Click Here To Read This Article

Update: Reserve Bank unlikely to cut key rate in February

As the leading banks have started slashing interest rates, real estate developers will soon see their borrowing costs declining.

October 04 2016

+ Click Here To Read This Article

Will Insurance Cover For Developers Expedite Infra Projects?

The issue of project delays may be close to getting sorted. The govt is planning to allow real estate developers to buy insurance cover for interest payments if their projects get stuck

July 25 2016

+ Click Here To Read This Article

Home Loan EMIs To Come Down As RBI Cuts Rate

In the first bi-monthly review of its monetary policy for 2016-17, RBI on Tuesday lowered the repo rate by 25 basis points to 6.5 per cent.

April 05 2016

+ Click Here To Read This Article

RBI Monetary Policy: Raghuram Rajan Leaves Interest Rates Unchanged

In the fifth bi-monthly monetary policy review of this year, RBI Governor Raghuram Rajan left the repo rate intact.

December 01 2015

+ Click Here To Read This Article

Is The Time Ripe For NCR Buyers To Book Their Dream Homes?

The Q2'FY16 report by PropTiger Data Labs suggests that now might be the right time to invest in NCR. Here's why.

November 10 2015

+ Click Here To Read This Article

Is NCR Losing Out To Mumbai, Bengaluru, Pune?

The National Capital Region, for very long, has been the largest residential real estate market in India. But, is NCR losing out to Mumbai, Bengaluru and Pune?

November 10 2015

+ Click Here To Read This Article

What Stops Banks From Passing On Rate Cut Benefits?

PropGuide on why monetary policy transmission in India is less efficient.

October 07 2015

+ Click Here To Read This Article

Here are the week’s top news stories from the real estate sector.

Here are today’s top news stories from the real estate sector.

Data show Bengaluru has seen the highest net office space absorption in the past nine years. This...

In the recently released World Happiness Report 2017, India is ranked 121 in a list of 155 nations....

The Goods And Services Taxes has clearned a proposal to charge a cess of 15 per cent on luxury cars...

The Centre recently gave its go-ahead to the construction of the national capital region’s second...

PropGuide tells you how a better metro connectivity will raise real estate prices in Noida.

The first phase of a Metro network is already changing the way people commute in Bengaluru. Upon...

A building code is a set of norms that govern construction of buildings by stipulating minimum...

PropGuide simplifies complex real estate jargons for you.

Proptiger has released it's quarterly review report on India's real estate sector. Ankur Dhawan,...

Prime lending rate is the interest rate at which banks lend to its most credit worthy...

Subscribe Now

To stay tuned with real estate updates

Pick:

x +

Drop Your Query here


Top