Understanding MCLR Based Home Loans: All You Need to Know

Rashi Sood

Last Updated on 1st July 2025

When taking a home loan, one important term you’ll come across is MCLR, which stands for Marginal Cost of Funds-based Lending Rate. It was introduced by the Reserve Bank of India (RBI) in April 2016 to make home loan interest rates more transparent and fair for both banks and borrowers. MCLR replaced the older base rate system, and it plays a big role in deciding how much interest you’ll pay on your loan.

If you’re planning to take a home loan, understanding how MCLR works can help you make better choices and even save money. In this guide, we’ll explain MCLR in simple terms and how it affects your home loan interest rate.

Table of Contents

MCLR in Banking
How Does MCLR Work
Current MCLR Rates
How MCLR Affects Home Loans
MCLR vs Base Rate vs Repo Rate
RBI Guidelines On MCLR
Choosing Between Fixed and Floating Rates

What is MCLR in Banking?

Definition and purpose

MCLR is the minimum interest rate that a bank can charge on loans. MCLR full form is Marginal Cost of Funds-based Lending Rate, and it is intended to reflect the marginal cost of funds, meaning it considers the cost incurred on new deposits and borrowings. The formula for MCLR calculation includes four components: the marginal cost of funds, negative carry on account of the cash reserve ratio (CRR), operating costs, and tenor premium.

Before the introduction of MCLR, banks in India followed the Base Rate system (in place since 2010) to decide lending rates. However, this system lacked transparency and was slow to reflect changes in the Reserve Bank of India’s policy rates. As a result, when the RBI lowered interest rates to boost the economy, banks often delayed passing on the benefits to borrowers.

To address this, the RBI introduced the Marginal Cost of Funds-based Lending Rate (MCLR) in April 2016. The aim was to create a more responsive and transparent system where lending rates closely followed changes in the cost of funds for banks. With MCLR, banks are required to consider factors such as the marginal cost of borrowing, operating costs, and the tenor premium, determining loan interest rates more accurately and fair.

How Does MCLR Work?

MCLR is an internal benchmark or reference rate for the bank. Every bank calculates its MCLR rate monthly by considering the marginal cost of funds (primarily the interest rate at which banks borrow money), return on net worth (according to capital adequacy norms), and operational expenses. The actual lending rates are determined by adding a spread to the MCLR, which covers the bank’s risk.

The general formula for MCLR is as follows:

MCLR = MCF + CRR Cost + Operating Costs + Tenor Premium

MCF (Marginal Cost of Funds): Calculated as the weighted average rate of all deposits, borrowings, etc.
CRR Cost (Negative Carry on Account of CRR): Reflects the return forgone on cash reserve ratio maintained with the RBI.
Operating Costs: A fixed percentage that covers the bank’s operational expenses.
Tenor Premium: Varies depending on the loan maturity period.

MCLR interest rates are reset at intervals agreed upon at the time of the loan sanction. Depending on your lender and the loan agreement, this could be once every six months or annually. This reset clause means that your loan’s interest rate will adjust and align with the current MCLR plus the spread at these intervals.

Current MCLR Rates

Bank	Overnight	1 Month	3 Months	6 Months	1 Year	2 Years	3 Years
State Bank of India (SBI)	8.20%	8.20%	8.55%	8.90%	9.00%	9.05%	9.10%
HDFC Bank	8.30%	8.30%	8.35%	8.45%	8.60%	8.70%	8.80%
Canara Bank	8.35%	8.35%	8.55%	8.90%	9.10%	9.35%	9.45%
Punjab National Bank (PNB)	8.40%	8.50%	8.70%	8.90%	9.05%	N/A	9.35%
Axis Bank	9.20%	9.20%	9.30%	9.65%	9.40%	9.50%	9.55%
IndusInd Bank	10.20%	10.25%	10.35%	10.45%	10.45%	10.45%	10.45%
RBL Bank	9.50%	9.75%	10.05%	10.40%	10.40%	N/A	N/A
DBS Bank	8.75%	8.80%	8.95%	9.00%	9.20%	9.00%	9.00%
IDFC First Bank	9.85%	9.85%	10.00%	10.10%	10.60%	N/A	N/A
Bank of India	8.25%	8.45%	8.60%	8.85%	9.05%	N/A	9.20%

How MCLR Affects Home Loans

The MCLR in banking directly impacts your home loan interest rate, which in turn affects your EMI and loan tenure, especially if your loan is on a floating interest rate.

Impact on EMI

When MCLR increases, your home loan interest rate rises, leading to higher EMIs (unless your bank chooses to increase the tenure instead).
When MCLR decreases, you either pay lower EMIs or the loan tenure shortens, depending on your bank’s policy and the loan agreement.

Most banks review your interest rate on a fixed reset date (usually every 6 to 12 months), so changes in MCLR affect your loan only after that date.

Let’s understand this with sample scenarios.

Scenario A: MCLR Increases by 0.50%

Loan Amount: ₹50 lakh
Old Rate: 8.50% → EMI = ₹43,391 (for 20 years)
New Rate: 9.00% → EMI = ₹44,986
Impact: EMI increases by ₹1,595/month or tenure is extended by ~18 months (if EMI is kept the same)

Scenario B: MCLR Decreases by 0.40%

Loan Amount: ₹50 lakh
Old Rate: 9.00% → EMI = ₹44,986
New Rate: 8.60% → EMI = ₹43,426
Impact: EMI drops by ₹1,560/month or tenure shortens by ~14 months (if EMI is kept the same)

MCLR vs Base Rate vs Repo Rate

Aspect	MCLR (Marginal Cost of Funds Based Lending Rate)	Base Rate	Repo Rate
Definition	Minimum lending rate below which banks cannot lend, except in certain permitted cases.	The minimum interest rate that banks charged before MCLR was introduced.	The rate at which the RBI lends money to commercial banks for short-term needs.
Purpose	To enhance the transmission of monetary policy and ensure transparent lending rates.	To ensure banks don’t lend below a minimum rate and protect profitability.	To control inflation, stimulate or slow economic growth, and regulate liquidity in the banking system.
Components	Marginal cost of funds, operating costs, negative carry due to CRR, and tenor premium.	Cost of deposits, profit margin, operating expenses, and cost of maintaining CRR.	Not applicable (it’s a benchmark policy rate set by the RBI).
Impact on Loans	Directly affects interest rates on floating-rate loans like home, auto, and personal loans.	Affects older loans taken before April 2016; relatively rigid to policy changes.	Indirectly affects interest rates; used to derive Repo Rate-linked loan pricing.
Set By	Individual commercial banks (within the RBI’s framework).	Individual commercial banks.	Reserve Bank of India (RBI).
Frequency of Change	Reviewed monthly by banks; loan rates reset periodically (e.g., every 6 or 12 months).	Changes less frequently; banks decide independently.	Reviewed bi-monthly during RBI monetary policy meetings.
Economic Focus	Improve internal efficiency and transparency in loan pricing; moderate policy transmission.	Maintain bank profitability; weak link to monetary policy signals.	A strong tool of monetary policy to influence inflation and liquidity.
Current Usage	Applicable to most home loans sanctioned between April 2016 and September 2019.	Mostly discontinued; applies only to legacy loans (pre-April 2016).	Actively used as a benchmark for Repo Rate Linked Lending Rate (RLLR).
Transparency	Moderately transparent; partial bank discretion in cost computation.	Low transparency; poor rate transmission.	Highly transparent; changes are publicly announced and uniformly applied.
Rate Transmission Speed	Moderate—depends on reset period.	Slow rates are not frequently adjusted.	Fast, immediate, or quick pass-through to lending/borrowing rates.

RBI Guidelines On MCLR

The RBI mandates that the actual lending rates on loans and advances be reset at least once a year, based on the MCLR to which the loan is linked.
The interest rate on fixed-rate home loans remains unchanged despite fluctuations in MCLR.
The marginal cost of funds calculation incorporates considerations of deposit balances and additional borrowing.
Banks are allowed to specify interest rate spreads and credit risk premiums over and above the base MCLR, but these must remain constant through the life of the loan agreement, unless the borrower’s credit assessment undergoes a substantial change as agreed upon in the loan contract.
Certain types of loans, such as loans against deposits, loans to banks’ employees, and loans linked to a market-determined external benchmark, are exempt from being linked to MCLR.
Existing borrowers on the base rate system have the option to switch to MCLR-based pricing, albeit banks can levy a reasonable fee for the switch, based purely on the costs involved.

Choosing Between Fixed and Floating Rates

When opting for an MCLR-linked loan, you’ll typically be choosing a floating rate loan. While fixed-rate loans provide certainty regarding EMI amounts throughout the loan period, floating rates offer the benefit of reduced interest rates when the MCLR drops. However, this also means your EMIs can increase with a rise in MCLR. Therefore, your decision might depend on your financial stability and risk tolerance.

Final Thoughts

For prospective homebuyers, deciding on the type of home loan interest rate – whether MCLR-based or linked to another benchmark – requires careful consideration of your financial situation and future outlook. With its dynamic adjustment feature, MCLR-based loans can be attractive during periods of monetary easing, where you can benefit from falling interest rates. However, it’s essential to stay informed about the economic conditions and RBI policies that influence these rates, to manage your loan effectively and avoid any financial strain due to rate hikes.

In summary, while MCLR has brought certain improvements to the lending landscape, aligning your home loan choice with your financial goals and market conditions will help you make the best decision. Always consult with a financial advisor or your bank to understand the detailed implications of these choices on your long-term financial health.

FAQs about MCLR-Based Home Loans

What is the current MCLR rate?

The current MCLR rate varies by bank and loan tenure (e.g., overnight, one month, three months, etc.). Each bank updates its MCLR rates monthly based on its costs and the Reserve Bank of India’s directives. You can find the latest rates directly on the respective bank’s official website or by contacting them.

What is an MCLR-based home loan?

An MCLR-based home loan is a type of loan where the interest rate is linked to the bank’s Marginal Cost of Funds-based Lending Rate (MCLR). The interest rate on the loan will reset at intervals depending on the MCLR at that time, which could change as the bank’s funding costs change.

Which one is better: MCLR or repo rate?

The choice between MCLR and repo rate-linked loans depends on how these rates are expected to change based on economic conditions. Repo rate-linked loans might be preferable in a falling interest rate scenario as they are expected to be more responsive to changes made by the RBI. MCLR might be better in a stable rate environment as it incorporates additional factors like deposit rates and the bank’s operational costs, which can provide some buffer against rapid changes in interest costs.

Which bank has the lowest MCLR rate?

The bank with the lowest MCLR rate can vary over time due to changes in the banking environment and RBI policies. Typically, larger banks might offer more competitive rates due to their ability to manage costs better. Checking comparison websites or the latest publications from financial news sources can provide current information.

How does MCLR affect home loans?

MCLR affects home loans by determining the interest rate applied to them. If the MCLR increases, the interest rate on home loans tied to it typically increases, leading to higher monthly payments or extended loan terms. Conversely, if MCLR decreases, borrowers might benefit from lower payments.

Does MCLR vary from bank to bank?

Yes, MCLR does vary from bank to bank. Each bank calculates its MCLR based on its own costs of funds, operational costs, CRR requirements, and risk perceptions. This means different banks will offer different MCLR rates at the same time.