MCLR vs. Repo Rate: Which Is Better for a Home Loan?

Interest rate benchmarks play an important role in how your Home Loan pricing moves over time. When you compare MCLR vs Repo Rate, you are essentially comparing an internal bank benchmark with an external benchmark linked to the Reserve Bank of India policy rate. This difference influences transparency, how quickly rate changes are passed on and how your EMI may adjust after a reset. This guide explains the meaning of each benchmark, key differences, how rate changes affect repayment and how to decide which option suits your profile.

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

What Is MCLR?

MCLR means Marginal Cost of Funds-Based Lending Rate. It is an internal benchmark that banks compute using factors such as the marginal cost of funds, the cost of maintaining cash reserve ratio, operating costs and a tenor premium. The Reserve Bank of India introduced the MCLR framework in April 2016 to improve monetary policy transmission compared to the earlier base rate system.

What Is the Repo Rate?

The repo rate is the rate at which the Reserve Bank of India lends to banks against eligible securities. In a repo rate linked Home Loan structure, lenders use an external benchmark framework where the benchmark is publicly observable, and changes are transmitted as per the reset rules. This can improve transparency for borrowers because the benchmark is not set by the lender.

MCLR vs Repo Rate: Key Differences

The difference between MCLR and repo rate becomes easier to see when you compare how each benchmark is set and how often it can change.

• Benchmark type: MCLR is an internal benchmark set by a bank, while repo rate linked lending uses an external benchmark tied to an RBI policy rate.
• Rate change frequency: MCLR is revised by banks on a schedule, while the repo rate can change with monetary policy decisions and is passed on as per external benchmark reset rules.
• Transmission speed: MCLR changes generally reach borrowers at the reset date, while repo-linked loans can transmit changes faster because the benchmark is external and reset at least quarterly in many structures.
• Transparency: Repo-linked pricing is easier to track because the benchmark is published publicly, while MCLR computation can vary across banks.
• Impact on EMI: Both can change your EMI or tenure after a reset, but repo-linked loans may reflect cuts or hikes sooner.

MCLR vs Repo Rate: How Do Interest Rate Changes Affect Your Home Loan?

In a repo rate linked Home Loan vs MCLR comparison, the practical difference is usually when the change shows up in your repayment plan. Under MCLR, the lending rate typically changes on your reset date. Under repo-linked structures, benchmark changes may be reflected after the next reset, which can be more frequent.

• When rates fall: Repo-linked loans may pass on reductions sooner, which can lower EMIs or shorten tenure depending on lender policy.
• When rates rise: Repo-linked loans may also pass on increases sooner, so budgeting a buffer can be important.

What you can do: You can estimate your monthly instalment using the Home Loan EMI Calculator while comparing different benchmark scenarios.

Also Read: How Repo Rate Changes Impact Home Loan EMIs in India

Benefits of MCLR-Based Home Loans

MCLR-based pricing can suit borrowers who prefer predictability through defined reset periods.

• More stable movement between resets: Your rate typically stays unchanged until the reset date, which can support budgeting.
• Predictable reset periods: The timing of potential changes is known in advance through the reset schedule.
• Lower immediate volatility: Rapid policy moves may not reflect instantly if your reset date is later.

Benefits of Repo Rate-Linked Home Loans

Repo rate Home Loan benefits often relate to transparency and faster transmission of benchmark changes.

• Higher transparency: The benchmark is publicly available and easier to track.
• Faster rate transmission: Benchmark changes can reflect after the next reset, which can support savings in a falling rate environment.
• RBI-driven benchmark: The benchmark is influenced by monetary policy rather than internal bank calculations.

MCLR vs Repo Rate: Which Is Better for You?

When you ask MCLR vs repo rate which is better, focus on how you prefer to manage change and uncertainty.

• If you want transparency: Repo-linked pricing can be easier to track and explain.
• If you prefer stability between resets: MCLR can feel more predictable because changes are tied to a reset schedule.
• If you expect rates to fall: Repo-linked loans may pass on reductions sooner, subject to reset rules.
• If you are cautious about rate hikes: A reset schedule can reduce immediate volatility, but the rate can still adjust at reset.

Final Thoughts

Both benchmarks can work well when you understand how resets and spreads affect your final interest rate. Compare transparency, transmission speed and how comfortable you are with rate movements. A benchmark that matches your risk comfort can make repayment planning more confident. For a Home Loan, selecting the right benchmark is especially important because even small interest rate changes can significantly impact long-term EMIs and overall repayment cost.

Apply now for a Home Loan.

FAQs

Q.1. What is the main difference between MCLR and the Repo Rate?

A. MCLR is a bank’s internal benchmark, while the repo rate is an RBI policy rate used as an external benchmark in repo-linked lending.

Q.2. Are repo rate-linked loans cheaper than MCLR loans?

A. They can be cheaper in a falling rate environment because benchmark reductions may transmit sooner, but the final rate depends on the spread and reset terms.

Q.3. Can I switch from MCLR to repo rate-linked Home Loans?

A. Many lenders allow a switch subject to terms, documentation and applicable fees. Review the lender’s policy before you decide.

Q.4. How often do MCLR rates change?

A. I Banks typically review and publish MCLR periodically, while your loan rate changes on your reset date based on the linked tenor.

Q.5. How does RBI’s repo rate impact Home Loan EMIs?

A. A repo rate change can influence lending rates over time and may change your EMI or tenure after the next reset, depending on your loan terms.

Disclaimer:

The content presented on this page, including images and factual information, is intended solely as a summary derived from publicly available sources. GHFL/GFL (“Company”) does not claim ownership of such information, nor does it represent that the Companies have exclusive knowledge of the same. While efforts are made to ensure accuracy, there may be inadvertent errors, omissions, or delays in updating the content. Users are strongly encouraged to independently verify all information and seek expert advice where necessary. Any decisions made based on this content are solely at the discretion and responsibility of the user. Godrej Capital and its affiliates assume no responsibility for any loss or damage that may result from the use of or reliance on the information provided herein.