Repo Rate vs MCLR Home Loan: Which Is Better?
Two home loans with the same headline rate can behave very differently. The reason is the benchmark they are tied to. Most new home loans today are linked to the RBI repo rate, while many older loans still run on MCLR. Knowing which one your loan uses tells you how fast your EMI changes when the RBI moves rates. This guide explains both in plain terms.
Short version
- Repo-linked loans move fully and quickly with RBI rate changes, usually resetting every three months.
- MCLR loans are set by the bank's own cost of funds and reset slowly, often every 6 to 12 months.
- Since October 2019, banks must link new floating retail loans to an external benchmark, mostly the repo rate.
- If you are still on MCLR, switching to a repo-linked loan can be worth it, but check the spread and conversion fee first.
What is a repo-linked home loan?
The repo rate is the rate at which the RBI lends to banks. It is currently 5.25%. Since October 2019, the RBI has required banks to link new floating-rate retail loans to an external benchmark. Most banks chose the repo rate. Your loan rate is then written as repo rate plus a spread. This spread covers the bank's margin and your risk profile.
So if the repo is 5.25% and your spread is 2.5%, your rate is 7.75%. When the RBI cuts the repo by 0.25%, your rate falls to 7.50% at the next reset, usually within three months. The link is direct and transparent, which is the main advantage. The flip side is that when rates rise, your EMI rises just as quickly.
What is an MCLR home loan?
MCLR stands for Marginal Cost of Funds based Lending Rate. It is an internal benchmark the bank calculates from its own cost of deposits, operating costs, and other factors. Your loan rate is the MCLR of a chosen tenure plus a spread. MCLR loans came in from April 2016 and were the standard until the external benchmark rule arrived.
The key feature of MCLR is the reset period. Your rate only changes on the reset date, often every 6 or 12 months, even if the RBI has already moved. This means transmission is slower. When the RBI cuts rates, MCLR borrowers wait longer to feel the benefit. When rates rise, they also feel the pain later.
Repo-linked vs MCLR: the real difference
| Feature | Repo-linked (EBLR) | MCLR |
|---|---|---|
| Benchmark | RBI repo rate (external) | Bank's cost of funds (internal) |
| Reset frequency | Usually every 3 months | Usually every 6 to 12 months |
| Speed of rate change | Fast and full | Slow and partial |
| Transparency | High, repo is public | Lower, set by the bank |
| Best when rates are falling | You benefit quickly | You benefit late |
Which one is better for you?
For most borrowers today, a repo-linked loan is the cleaner choice. You can see the repo rate yourself, and you know your EMI will follow it. In a falling or stable rate cycle, that transparency works in your favour. In a rising cycle, a repo-linked loan hurts faster, but you cannot escape rate risk on any floating loan for long.
MCLR still exists for borrowers who took loans before October 2019 and never switched. If that is you, compare your current effective rate against a fresh repo-linked offer. Sometimes the slow MCLR reset is quietly keeping you on a higher rate than the market.
Should you switch from MCLR to a repo-linked loan?
You have two routes. You can ask your existing bank to convert your MCLR loan to a repo-linked one, usually for a small conversion fee. Or you can do a balance transfer to another lender offering a lower repo-linked rate. Before you switch, compare the total rate, rather than only the benchmark. A repo-linked loan with a high spread can still cost more than a well-priced MCLR loan. Read the fine print on the spread, since the bank can only reset the spread at long intervals or on a change in your credit profile. For the mechanics of moving your loan, see our guide on home loan balance transfer, and use our property listings when you plan your next purchase.
A quick worked example
Suppose you have a ₹50 Lakh loan for 20 years. On a repo-linked loan at 7.75%, your EMI is roughly ₹41,000. If the RBI cuts the repo by 0.50% and your rate drops to 7.25%, your EMI falls to about ₹39,500 within a quarter. An MCLR borrower with a 12-month reset might keep paying the higher EMI for several more months before the cut reaches them. Over the life of the loan, that timing difference adds up. To plan your own numbers, our home loan EMI guide walks through the full math.
Frequently asked questions
Is a repo-linked home loan better than MCLR?
For most borrowers, yes, because it is transparent and moves fully with the RBI repo rate. It benefits you quickly when rates fall, though it also raises your EMI faster when rates rise.
Can I switch my MCLR loan to a repo-linked loan?
Yes. You can ask your bank to convert it for a small fee, or do a balance transfer to another lender. Compare the full rate and spread before switching.
How often does a repo-linked loan reset?
Usually every three months. MCLR loans typically reset every 6 to 12 months, which is why they respond to RBI moves more slowly.
What is the spread in a home loan?
The spread is the margin the bank adds over the benchmark. Your rate equals the benchmark, repo or MCLR, plus this spread, which reflects the bank's margin and your credit profile.
Know your benchmark before you sign, and revisit it every couple of years. On a floating loan, the benchmark and reset speed quietly decide how much interest you really pay.
