What is EBLR and How Does it Impact Your Home Loan Interest Rates?

For effective financial planning, it is important to know how your Home Loan interest rate is arrived at. External Benchmark Lending Rate (EBLR) is one of the most popular phrases in recent times. But, what does it actually mean and how does one decide it? This article looks at everything that the EBLR entails as well as its impact on home loan interests in India.

Also Read: Home Loan: All You Need to Know – Godrej Capital

What is EBLR?

The Reserve Bank of India introduced the External Benchmark Lending Rate (EBLR) in October 2019. The new system requires that financial institutions link their lending rates, including home loans, to an external benchmark. The most popularly used external benchmark is the repo rate which is the rate at which the RBI lends money to commercial banks.

Common External Benchmarks Used for EBLR

The External Benchmark Linked Rate (EBLR) ties your home loan interest rates to a benchmark set by regulatory bodies, ensuring transparency and quicker transmission of RBI policy rate changes to borrowers. Lenders in India use the following benchmarks:

• Repo Rate: The rate at which the Reserve Bank of India (RBI) lends money to commercial banks.
• 3-Month Treasury Bill Yield (published by FBIL): Reflects short-term government borrowing costs and serves as a reliable benchmark for floating rate loans.
• 6-Month Treasury Bill Yield (published by FBIL): Indicates medium-term government borrowing rates, influencing longer-tenure loan interest movements.
• Any Other Benchmark by FBIL: FBIL (Financial Benchmarks India Pvt. Ltd.) may publish additional benchmarks that banks can adopt to link their lending rates.

These benchmarks ensure that changes in monetary policy are quickly passed on to borrowers, making home loan interest rates more market-driven.

Key Features of EBLR:

• Transparency: By linking lending rates to external benchmarks, the process becomes more transparent for borrowers.
• Quick Transmission: Changes in the benchmark rate, such as the repo rate, are quickly reflected in lending rates, ensuring that borrowers benefit promptly from rate reductions.
• Standardisation: All lenders adopt a uniform approach, making it easier for borrowers to compare loan products.

How Does EBLR Affect Home Loan Interest Rates?

When you opt for an EBLR home loan, your interest rate is directly tied to the external benchmark plus a spread determined by the lender. This means:

• Immediate Impact of Rate Changes: If the RBI reduces the repo rate, your EBLR home loan interest rate decreases correspondingly, leading to lower Equated Monthly Instalments (EMIs).
• Predictable Adjustments: Regular resets ensure that your loan remains aligned with current market conditions.

Example:

• Repo Rate: 6.25% (as of February 2025)
• Lender's Spread: 2.65%
• EBLR Home Loan Interest Rate: 6.25% (repo rate) + 2.65% (spread) = 8.90%

If the Reserve Bank of India (RBI) reduces the repo rate by 25 basis points, the interest rate for your Home Loan would then drop to 8.65% and this translates into lower EMIs on your part.

Advantages of EBLR-Linked Home Loans

• Immediate Benefits: Borrowers benefit promptly from reductions in benchmark rates.
• Transparency: Clear linkage to external benchmarks makes it easier to understand how interest rates are determined.
• Competitive Rates: Lenders may offer attractive spreads to attract customers.

Considerations for Borrowers

While EBLR home loans offer several benefits, it's essential to consider potential challenges:

• Rate Volatility: Since the interest rate is linked to external benchmarks, it can increase if the benchmark rate rises, leading to higher EMIs.
• Credit Risk Premium: Lenders may add a spread based on your credit profile, which can affect the final interest rate.

How to Calculate Your EBLR Home Loan Interest Rate

The EBLR (External Benchmark Linked Rate) is determined by adding three key components:

Formula:

EBLR = External Benchmark + Lender’s Spread + Credit Risk Premium

1. External Benchmark:

This is the reference rate published by the RBI or FBIL, such as the Repo Rate (currently 6.25%). It changes as per monetary policy, directly impacting your home loan rate.

2. Lender’s Spread:

A fixed margin added by the bank to cover operating costs and profit. This is decided by each lender and does not change frequently. Example: 2.65%.

3. Credit Risk Premium (if applicable):

This depends on your credit score, repayment capacity, and profile. Borrowers with higher creditworthiness may get a lower premium, while those with weaker profiles may pay more. Example: 0.25%.

Example Calculation:

• Loan Amount: ₹50,00,000
• Tenure: 20 years
• Repo Rate (External Benchmark): 6.25%
• Lender’s Spread: 2.40%
• Credit Risk Premium: 0.25%

EBLR Interest Rate = 6.25% + 2.40% + 0.25% = 8.90%

At an 8.90% interest rate, the monthly EMI for ₹50 lakh over 20 years comes to approximately ₹44,659, with a total interest payable of about ₹57.18 lakh.

This makes the EBLR-linked home loan procedure transparent, as borrowers can clearly understand how their interest rate is derived and monitor it whenever RBI announces changes.

Challenges of EBLR for Borrowers and Banks

While the External Benchmark Linked Rate (EBLR) brings transparency and aligns lending rates with market conditions, it also comes with a few challenges for both borrowers and lenders.

For Borrowers:

• Rate Volatility: Since EBLR is linked to benchmarks like the RBI Repo Rate, even small policy changes can impact your loan interest rate. This means EMIs may fluctuate multiple times in a year.
• Unpredictable EMIs: Unlike fixed-rate loans, borrowers cannot accurately predict long-term EMIs and total interest payable, making financial planning more complex.
• Variable Credit Risk Premium: Lenders may revise the credit risk premium depending on your repayment history and credit score, which can unexpectedly increase your loan cost.

For Banks and Lenders:

• Pressure on Margins: Banks must frequently revise rates in line with RBI’s repo rate changes, which can squeeze profit margins.
• Operational Complexity: Frequent recalculations and communication with borrowers increase administrative workload.
• Portfolio Risk Management: Sudden repo rate cuts may reduce lending rates, affecting long-term profitability and balance sheet stability.

By understanding these EBLR challenges, borrowers can prepare for EMI fluctuations, while banks can strengthen their risk management strategies. Despite these hurdles, the benefits of EBLR such as transparency and fairer pricing make it a significant step towards customer-centric lending.

Switching Your Home Loan from MCLR to EBLR

If you’re currently repaying a home loan linked to MCLR (Marginal Cost of Funds Based Lending Rate), you may benefit from switching to an EBLR (External Benchmark Linked Rate)-based loan. Since EBLR is directly linked to benchmarks like the RBI Repo Rate, it ensures faster transmission of policy rate changes to borrowers.

How to Switch Home Loan from MCLR to EBLR

1. Check Your Current Loan Terms: Review your existing loan agreement, interest rate, and remaining tenure.
2. Contact Your Lender: Approach your bank or housing finance company to request a switch from MCLR to EBLR.
3. Pay Conversion Charges: Lenders may levy a one-time fee or conversion charge for switching.
4. Update Documentation: Sign a fresh loan agreement or addendum reflecting the EBLR-linked terms.
5. Start Repayment under EBLR: Your EMI will now be recalculated as per the EBLR rate.

Benefits of Switching to EBLR

• Faster Rate Transmission: RBI repo rate changes are reflected quickly in your loan rate.
• Transparency: The benchmark is external and publicly available, reducing hidden pricing.
• Potential Savings: Lower interest rates could reduce your EMI or total interest outgo.
• Flexibility: Option to adjust loan tenure or EMI as per new rates.

Possible Costs and Considerations

• Conversion Fee: A one-time charge (varies by lender).
• Processing Time: Updating loan agreements and recalculations may take a few days.
• Volatility: EBLR-linked loans may change more frequently, leading to EMI fluctuations.

Pro Tip: Compare the interest rate difference between your current MCLR loan and the EBLR-linked loan. If the gap is significant and you have a long tenure left, switching can lead to substantial savings.

Also Read: How to reduce interest payment on Home Loan?

The Bottom Line

With the advent of the External Benchmark Lending Rate (EBLR), transparency in interest rates on a Home Loan has increased in India, resulting in responsiveness to home loans. With recent reductions in the repo rate by the RBI, borrowers with EBLR home loans stand to benefit from lower interest rates and reduced EMIs. It's advisable to stay informed about changes in benchmark rates and understand how they impact your loan. If you're considering to apply for a loan, now is a great time to explore EBLR-related home loan options.

Moreover, use a Home Loan eligibility calculator to determine the amount you can get.

FAQs

Q.1. Is EBLR better for home loans?

A. Benchmarking home loan rates to EBLR offers many benefits. It facilitates enhanced transparency, quicker rate transmission to potential savings on interest payments, empowers borrowers to make well-informed financial decisions and exploit favourable market conditions.

Q.2. What are the disadvantages of EBLR?

A. The high volatility of EBLR is one of the greatest disadvantages of it. Thus, one needs to be prepared to process the successive changes in your loaning rates.

Q.3. Who decides EBLR?

A. EBLR are set by the banks based on external benchmarks such as repo rate by the RBI. So, when RBI changes its benchmark rate, banks adjust EBLR accordingly.

Q.4. Is EBLR mandatory?

A. Yes, EBLR is mandatory for all floating rate retail loans and MSME loans issued by banks since October 2019, as per RBI guidelines.

Q.5. How is EBLR calculated?

A. EBLR (External Benchmark Lending Rate) is like a price tag for loans. Banks set it based on RBI rates. If RBI changes rates, EBLR changes too. So, if RBI lowers rates, your loan interest may drop, and vice versa!

Q.6. What is the full form of EBLR in Banking?

A. EBLR stands for External Benchmark Linked Rate. It is an interest rate benchmark linked to an external reference such as the RBI Repo Rate or Treasury Bill yield, making loan pricing more transparent and responsive to market changes.

Q.7. How is EBLR different from MCLR?

• MCLR (Marginal Cost of Funds Based Lending Rate): An internal benchmark set by each bank, influenced by its cost of funds, deposit rates, and operating costs.
• EBLR (External Benchmark Linked Rate): Directly linked to external benchmarks like the RBI Repo Rate, ensuring faster transmission of policy rate changes to borrowers.
• 👉 Simply put, MCLR is internal and slower to change, while EBLR is external and more dynamic.

Q.8. Which type of loans are linked to EBLR?

A. As per RBI guidelines, all new floating-rate retail loans (such as home loans, personal loans, education loans) and loans to MSMEs sanctioned after October 2019 must be linked to an EBLR. Fixed-rate loans, however, may not be directly linked unless specified.

Q.9. Can I switch my existing MCLR loan to EBLR?

A. Yes, borrowers can switch from MCLR to EBLR by submitting a request to their lender. This process may involve a conversion fee or administrative charges, but it often benefits customers with better rate transparency, faster policy transmission, and potentially lower EMIs in the long run.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.