Last Updated on April 14, 2026 by teamtfl
When you take a home loan, the interest rate your bank charges is not invented out of thin air. It is built on a foundation — a benchmark rate that the bank uses as its starting point.
In India, that benchmark has changed twice in the last 15 years. Understanding how it works — and how it affects your loan — is one of the most practically useful things a borrower can know.
⚡ Quick Answer
India has moved through three benchmark rate systems for bank loans: PLR (Prime Lending Rate) until 2003, Base Rate from 2010, and MCLR (Marginal Cost of Funds based Lending Rate) from 2016. Since 2019, all new floating rate retail loans are linked to external benchmarks like the RBI Repo Rate. If you took a home loan before 2019, you may still be on MCLR. Understanding which system your loan is on — and whether to switch — can save you significant money.
Why the Base Rate System Was Introduced in 2010
Before 2010, Indian banks used the PLR — Prime Lending Rate — as their benchmark. The PLR system had a fundamental problem: banks were not required to follow any transparent methodology in setting it. Two banks could have very different PLRs even when borrowing from the same market at the same cost. Borrowers had no way to compare rates meaningfully.
In July 2010, RBI mandated the Base Rate system. The Base Rate was defined as the minimum below which banks could not lend (with limited exceptions). Crucially, banks had to disclose the methodology for calculating their Base Rate — making the system more transparent than PLR.
The Base Rate was supposed to ensure that when RBI cut rates, borrowers actually benefited. In practice, banks were slow to pass on cuts. A repo rate cut of 25 basis points might result in a Base Rate cut of 10 basis points — or nothing at all.
MCLR: The 2016 Upgrade
In 2016, RBI replaced the Base Rate with MCLR — Marginal Cost of Funds based Lending Rate. The key difference: MCLR is calculated based on the bank’s marginal (most recent) cost of funds, not the average cost. This was designed to make rate transmission faster.
MCLR is reset at defined intervals — monthly, quarterly, six-monthly, or annually depending on the loan. Your loan’s effective rate changes only on the next reset date after a benchmark change.
If you took a home loan between 2016 and 2019, it is likely on MCLR. Your reset date matters — if RBI cuts rates in January but your loan resets in July, you will not see the benefit until July.
Is your home loan on the best available rate?
A financial review can check if you should switch benchmarks or refinance — potentially saving lakhs over your loan tenure.
The Current System: External Benchmark Linked Rates (EBLR)
Since October 2019, RBI mandated that all new floating rate retail loans — home loans, personal loans, auto loans — must be linked to an external benchmark. Banks can choose from: RBI Repo Rate, Government of India 91-day Treasury Bill yield, Government of India 182-day Treasury Bill yield, or any other benchmark published by FBIL.
Most banks chose the RBI Repo Rate. This means your home loan rate is now: Repo Rate + Spread. The spread is fixed for the life of the loan (unless you renegotiate).
The advantage of EBLR over MCLR: rate changes happen faster. When RBI cuts the Repo Rate, your loan rate typically adjusts within the same quarter.
In 2022-23, when RBI raised the Repo Rate by 250 basis points to fight inflation, home loan rates across India rose sharply and quickly — demonstrating exactly how fast this system transmits changes.
What This Means for Your Home Loan
If your loan was taken before October 2019, it may still be on Base Rate or MCLR. You have the option to switch to EBLR — most banks allow this for a small administrative fee (typically Rs 5,000-10,000).
Whether you should switch depends on the current rate differential. If your MCLR-linked rate is 9.2% and the equivalent EBLR-linked rate would be 8.75%, the switch saves you 0.45% per year — which on a Rs 50 lakh loan over 15 years is a meaningful amount.
The calculation is simple: get your current effective rate from your bank. Ask what EBLR-linked rate they would offer. Calculate the interest saving over your remaining tenure. Compare against the switching cost.
One Thing Many Borrowers Miss
Many borrowers focus only on the EMI when taking a home loan. The more important questions are: what is the benchmark? When does it reset? Can I switch benchmarks if rates fall? Can I prepay without penalty?
The answers to these questions determine your flexibility over a 20-year loan tenure — and the total interest you pay. There are several ways to reduce your total home loan interest cost that go beyond just negotiating the rate at origination.
Understanding your benchmark system is the foundation. It is not exciting. But it is the difference between automatically benefiting from every RBI rate cut — or waiting months while your bank’s cost of funds catches up.
Frequently Asked Questions on Home Loan Benchmark Rates
What is the difference between MCLR and repo rate-linked home loans?
MCLR (Marginal Cost of Funds based Lending Rate) is set internally by each bank based on its cost of deposits and borrowings, and resets at fixed intervals (typically every 6-12 months for home loans). A repo rate-linked loan (EBLR) moves directly with RBI’s benchmark repo rate, usually within the same quarter. EBLR transmits rate cuts faster to borrowers — but also transmits rate hikes faster, as borrowers discovered in 2022-23 when the Repo Rate rose 250 basis points.
Should I switch my existing home loan from MCLR to repo rate linked?
Compare your current effective rate (MCLR + spread) against what the bank would offer on an EBLR loan (Repo Rate + spread). If the EBLR rate is at least 0.25-0.3% lower and you have 10+ years of loan tenure remaining, the switch typically pays off within 12-18 months. Most banks charge Rs 5,000-10,000 for the conversion. Request a written comparison of both rates from your bank before deciding.
How often does a repo rate-linked home loan interest rate change?
Under RBI guidelines, EBLR-linked loans must be reset at least once every 3 months. In practice, most banks reset monthly or quarterly. When RBI changes the repo rate, your bank typically passes on the change within the next reset cycle. This means if RBI cuts rates in February, your loan rate may adjust by April or May depending on your bank’s reset schedule.
Can I negotiate a lower spread on my home loan?
The spread on a repo rate-linked loan is fixed at the time of origination — banks are not supposed to change it unilaterally. However, borrowers with excellent credit scores (750+), significant prepayment history, or long relationships with the bank sometimes successfully negotiate a lower spread when refinancing or switching benchmarks. Always ask — the worst answer is no. A 0.1% reduction in spread over a 20-year, Rs 50 lakh loan saves approximately Rs 1.5-2 lakh in total interest.
Your bank does not send you a reminder when it is time to review your loan structure. That responsibility is yours. And the cost of not doing it — over a 20-year loan at the wrong rate — can be lakhs.
Do the Right Thing. Then Sit Tight. But first — make sure you understand what rate your loan is actually sitting on.
💬 Your Turn
Do you know what benchmark your home loan is linked to? Have you ever switched from MCLR to EBLR, or from Base Rate to MCLR? Share what you found — and whether the switch was worth it.