Home Loans

MCLR vs Repo Rate: What Really Changes Your Home Loan EMI

Buying a home often comes down to small numbers. Even a tiny change in interest can increase or reduce your EMI for years. That’s why your home loan interest rate is tied to matters. In India, most floating home loans use either a bank’s MCLR or the RBI’s repo rate. The names might sound similar, but they work in different ways. Understanding the difference between the MCLR rate vs repo rate will help you pick the best and cheapest option.

MCLR is an internal rate that each bank calculates from its own cost of funds, operating expenses, and a tenor premium. Because it is internal and tied to a reset date, your rate tends to move with a lag. The repo rate is the RBI’s policy rate at which it lends to banks against government securities. When your loan is repo-linked, policy changes usually reach your EMI faster because banks reset these loans at least once every quarter.

Table of Contents

What is the Repo rate
Difference Between Bank Rate and Repo Rate
What is MCLR
MCLR vs Repo-Linked Rate (RLLR/RBLR)
How Banks Set Your Effective Home Loan Rate

Read the blog further to learn the difference between MCLR rate and repo rate, and how they can affect your home loan EMI.

What is the Repo rate?

The repo rate is the rate at which the Reserve Bank of India (RBI) lends short-term funds to banks against government securities. When the repo rate falls, banks’ funding cost drops and, ideally, your floating loan rate falls too, especially if your loan is pegged to an external benchmark like the repo.

Suggested read: Repo Rate Impacts on Home Loan

Knowing the Difference Between Bank Rate and Repo Rate

Repo rate: Short-term lending by RBI to banks with collateral (government securities), mainly to manage short-term liquidity and signal the policy stance. Your repo-linked home loan responds to this.
Bank rate: The rate at which the RBI is prepared to lend to commercial banks without a repurchase agreement. In practice today, RBI keeps the bank rate aligned with the Marginal Standing Facility (MSF) rate, which is an overnight emergency window and is typically above the repo rate. Policy updates often announce the MSF and bank rate together.

What is MCLR?

MCLR stands for Marginal Cost of Funds-based Lending Rate. It is an internal benchmark each bank computes. MCLR is the minimum rate below which a bank cannot lend for a given tenor, and it replaced the base rate system from April 1, 2016.

Banks calculate MCLR using four ingredients:

Marginal cost of funds (what it costs the bank to raise money)
Negative carry on CRR (cost of the cash reserve they must keep with RBI, which earns no interest)
Operating costs
Tenor premium (longer loans priced higher than shorter loans)

Suggested read: MCLR Based Home Loan

MCLR vs Repo-Linked Rate (RLLR/RBLR): Comparison

Speed of Transmission to Your EMI

Repo-linked: Faster. Your rate must reset at least every 3 months, and some banks even reset monthly. When the RBI cuts or hikes, your EMI or tenure reflects it quickly.
MCLR: Slower. If your reset period is 12 months, a cut today might show up months later.

Transparency

Repo-linked: Transparent. The benchmark is public (RBI policy repo rate), and the bank discloses a fixed spread. Your rate = Repo + Spread. Any RBI move is easy to track.
MCLR: Less transparent for consumers. MCLR depends on the bank’s internal costs and methodology. Two banks can have different MCLRs for the same tenor.

Spread flexibility

Repo-linked: Spread changes are constrained by rules. Credit-risk spread should change only if your credit risk changes materially; other spread components can be revised only once in three years.
MCLR: Banks have more leeway because both the benchmark (MCLR) and your spread are internal.

How Banks Set Your Effective Home Loan Rate?

Whether your loan is on MCLR or repo-linked, the bank quotes:

Effective Rate = Benchmark + Spread

Under repo-linked rules, the benchmark is the RBI repo (or another allowed external benchmark), and the spread is meant to be stable, with limited reasons to change.
Under MCLR, both the MCLR curve and your spread are internal. RBI specifies the ingredients of MCLR, but the bank’s actual numbers vary by funding costs and strategy.

In the end, the “better” choice between MCLR and repo-linked rates comes down to how you balance risk, speed of change, and your own loan timeline. MCLR moves slowly and can feel more stable, but it may delay the benefit when rates fall. Repo-linked loans react faster to RBI moves, which is great in a falling-rate cycle, but it also means your EMI can climb just as quickly when rates rise.

You should look at where interest rates are in the cycle, how many years you have left on your loan, your cash flow comfort, and how often your rate resets. Check your current spread over MCLR or repo, see what your bank is offering new customers, and compare the actual EMI and total interest outgo, not just the headline rate.

FAQs about MCLR vs Repo Rate

What is MCLR, and how is it linked to home loan interest rates?

What is MCLR, and how is it linked to home loan interest rates?
MCLR (Marginal Cost of Funds-based Lending Rate) is a bank’s internal benchmark. Each bank computes it from its cost of funds, the negative carry on CRR, operating costs, and a tenor premium. For a home loan priced on MCLR, your interest rate is usually shown as:
Interest rate = MCLR (for a given tenor) + Spread
The loan then resets at a fixed interval, often every 6 or 12 months. Until that reset date, your rate stays the same even if market rates move. That timing is why MCLR loans may react slowly to policy changes.

How does the repo rate differ from MCLR?

The repo rate is set by the RBI. It is the rate at which the RBI lends to banks against government securities. It is an external benchmark. MCLR is set by each bank using its own formula. It is an internal benchmark.
So, repo rate moves are policy signals that flow directly into repo-linked home loans, while MCLR moves depend on each bank’s funding costs and its scheduled reset cycle.

Which rate affects my home loan more: MCLR or Repo Rate?

It depends on what your loan is linked to.
If your loan is repo-linked (often called RLLR or RBLR), the repo rate affects you more because your rate must reset at least quarterly.
If your loan is on MCLR, the bank’s MCLR and your loan’s reset date matter more, and changes tend to be slower.
Many new floating-rate retail loans today are repo-linked. Older loans may still run on MCLR unless you switch.

Can MCLR change even if the repo rate remains the same?

Yes. MCLR can move even when the repo rate is unchanged because it is driven by a bank’s own cost of funds, operating costs, and tenor premium. For example, if a bank’s deposit costs rise, its MCLR may increase even in a flat policy environment. The reverse can also happen if the bank’s funding costs fall.

How do banks use MCLR and repo rate to calculate EMIs?

Banks start with a benchmark and add a spread based on factors like credit risk and operating costs:
Repo-linked loan:
Rate = Repo rate + Spread
Resets at least every three months.
MCLR-linked loan:
Rate = MCLR (chosen tenor) + Spread
Resets on your loan’s scheduled reset date.
Once the annual interest rate is set, your EMI is calculated from the standard formula using the loan amount and remaining tenure.
Quick example: ₹50 lakh for 20 years
At 8.25%, EMI is about ₹42,600.
At 7.75%, EMI is about ₹40,900.
Even a 50 bps change can shift your monthly outgo by ₹1,500 to ₹2,000 on a ₹50 lakh, 20-year loan, which is why the benchmark you are on (MCLR vs repo rate) and the reset rules matter.