Why is it time to switch from MCLR and base rate to repo-linked home loans?

When interest rates go down, it is often a signal of economic challenges like slowing growth or weak demand. But falling rates bring good news for homebuyers and homeowners: cheaper loans and more affordable housing. So far in 2025, the Reserve Bank of India (RBI) has slashed its benchmark repo rate twice. Home loan interest rates have now dipped below 8%, the lowest since 2022, and more cuts could follow.

This presents a golden opportunity for those with existing home loans to revisit their borrowing terms. Lower interest rates reduce the total interest you pay over time, helping you close your loan faster. For new borrowers, this translates to higher loan eligibility and the possibility of buying a better or bigger home at a manageable EMI.

Benchmark basics

Your home loan interest rate is tied to a benchmark, which determines how low your loan rate can go. Over the years, these benchmarks have evolved. Before 2016, banks used the base rate. From 2016 to 2019, they switched to MCLR (Marginal Cost of Funds Based Lending Rate). From 2019, most banks have adopted the repo-linked rate on the RBI’s instructions.

“Having the right benchmark is the key to higher savings and paying off your loan faster,” says Adhil Shetty, CEO of BankBazaar.

As of December 2024, RBI data shows that 60.4% of outstanding floating rate loans are linked to the repo rate, 35.6% are still on MCLR, and 2% each remain on base rate and other older benchmarks.

Advantages of repo rate

In a repo-linked loan, your interest rate consists of two parts: the repo rate and a fixed spread set by your bank based on your credit score, income, and risk profile. The spread stays constant throughout the loan. For instance, if the repo rate is 6% in May 2025 and your spread is 2%, your effective rate is 8%.

Repo rates are adjusted by the RBI depending on inflation trends. When inflation rises, the repo rate goes up; when it falls, the rate drops. Crucially, changes in the repo rate are passed on to borrowers within three months automatically and at no extra cost.

Slower MCLR

Loans linked to the MCLR are slower to reflect changes. Though the reset is automatic and does not involve charges, it happens every 6 to 12 months. This delay means borrowers do not benefit from rate cuts as quickly.

Outdated base rate

Base rate loans are tied to an even older system, where changes are at the bank’s discretion. Borrowers often make a written request and may be charged a fee to shift to newer benchmarks. This system is neither transparent nor efficient.

Clear choice

In simple terms, repo-linked loans (also known as RLLR, EBLR, or RBLR loans) reset quickly, fully, and at no cost to the borrower. MCLR loans reset slowly and less predictably. Base rate and BPLR loans offer the least benefits and the most friction.

“In the falling rate scenario in 2025, borrowers can strongly consider a repo-linked, floating rate home loan from a bank for higher savings and lower fees,” advises Shetty.

If you are still on MCLR or base rate, now is the time to make the switch. It could save you lakhs over the loan tenure and bring you closer to living debt-free, faster.