The floating rate of home loan is linked to its base rate or its Benchmark Prime Lending Rate (BPLR). As per RBI’s direction the base rate system has been introduced in all Banks to replace the BPLR system with effect from July 1, 2010. The base rate makes pricing more transparent as banks are not permitted to lend below base rate and also base rate has to be disclosed publicly. BPLR has now lost its importance and is normally applicable now for loans which have been sanctioned before the introduction of Base Rate.
The floating rate is arrived at after a margin is added to the base rate (for instance 50 bps). Each bank has a different base rate because it arrives at the calculation after considering factors such as cost of funds etc. This base rate is reviewed each quarter depending upon the macroeconomic situation following which the floating rate of interest may change and impact your EMI as well. There are two things to remember about the relationship of the floating rate with the base rate.
i. While the base rate may change, a bank cannot lend below its base rate.
ii. Once a bank offers a ‘spread’ or ‘margin’ to a customer, it cannot change that. So, assuming that a base rate of a bank drops from an existing 10% to 9.75% the interest rate for a customer (who has been offered a margin of 50 bps) will come down to 10.25 from the earlier 10.5%.