Why shifting your home loan from BPLR to base rate is beneficial

In 2004, Delhi-based Radhakrishnan Nair took a home loan of `7.28 lakh from a private sector bank at 7.5%, even as other nationalised banks were offering higher rates. Today, the same bank is charging him 14.75%. More importantly, the loan that should have been repaid by the time he retires eight years from now has been extended by 21 years.


Nair is not alone. There are many like him whose home loan rates have shot up to 15% what with the rates rising for the third time since the start of this financial year. Such people could benefit by shifting from the BPLR or the benchmark prime lending rate to the base rate. How?

How will shifting help?
If you had applied for a home loan before 1 July last year and it hasn't been renewed since then, in all likelihood, the interest on your loan is still based on BPLR. It has now been a year since the Reserve Bank of India directed banks to move from the BPLR to base rate as the benchmark interest rate for loans granted after 1 July. No banks are allowed to lend below this base rate.

"If you have taken a loan just after 1 July, ensure that your bank has linked your rate to the base rate. This is applicable for clients who have borrowed before 1 July," suggests Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy. While borrowers may not find immediate relief in shifting to the base rate, they can benefit later when the rates start to drop because these will fall faster than those linked to the BPLR.

This is because base rate is more transparent then BPLR. If the interest rates fall, banks will have to lower the base rate, which is a function of the cost of funds in the market. As all the variable rates of interest are pegged to the base rate, the borrowers will gain from any cut in this rate. Hence, it is advisable to opt for it. "If you are one of the old borrowers who had taken a loan around 2006, right now you might be paying 13-14% on your home loan. There may not be an immediate benefit on interest rate, but you will get on to a system that is more transparent," says Harsh Roongta, chief executive officer at

What if rates don't reduce immediately?
If your home loan rate doesn't come down immediately after shifting to the base rate, don't worry. It will the moment the RBI decides to reduce rates. However, the BPLRlinked home loan rate may not fall. "Under the benchmark prime lending rate, banks increase these when the rates are going up, but do not reduce these when they go down. Also, the differential treatment given to old borrowers vis-a-vis new borrowers will be reduced under the base rate scenario," says Roongta.

"Since the introduction of the base rate, the rates have been consistently rising and, hence, it is difficult to gauge and give a practical instance of benefits derived by consumer on account of the base rate. Assuming the banks will adopt the same policy and pass on the benefits of softening of credit/monetary policy, the base rate regime may prove beneficial to consumers," adds Patel