MCLR vs repo-linked home loans: the difference that could save you lakhs

Two people walk into the same bank on the same day. Both borrow ₹60 lakh over 20 years. Both have similar salaries and excellent credit scores.

Five years later, one has gained every time the RBI reduced rates. The other is paying almost the same rate they started with. Neither made a mistake.

The difference is a small clause most people never read: whether the loan is linked to MCLR or to the repo rate. That one line decides how quickly your loan responds to RBI moves, and how much interest you pay over the years.

What is MCLR?

MCLR, the Marginal Cost of Funds Based Lending Rate, is an internal benchmark each bank calculates for itself. Instead of following the repo rate directly, the bank works out its own number from its cost of deposits, cost of borrowing, operating expenses, CRR requirements, and a tenor premium.

Every bank has a different cost structure, so every bank's MCLR is different. When those costs change, the bank may revise its MCLR. Note the word: may. Unlike a repo-linked loan, MCLR does not automatically move every time the RBI announces a cut.

What is a repo-linked home loan?

A repo-linked home loan is tied directly to the RBI's repo rate, an external benchmark. Your interest is usually the repo rate plus a bank spread.

When the RBI changes the repo rate, your loan becomes eligible for a revision at your next reset. That makes repo-linked loans more transparent and usually quicker to respond to policy changes.

The biggest difference

Picture two map apps. One updates the moment traffic changes. The other refreshes now and then. Both get you there, but one responds faster.

Repo-linked loans respond faster to RBI changes. MCLR loans respond on the bank's own funding costs and review schedule. That gap decides how quickly you benefit when rates fall.

Side by side

• Benchmark: MCLR is an internal bank benchmark; repo-linked follows the RBI repo rate.
• Transparency: MCLR is moderate; repo-linked is high.
• Response to RBI cuts: MCLR is usually slower; repo-linked is usually faster.
• Rate reset: MCLR is bank-specific; repo-linked follows your loan's reset cycle.
• Where you find it: MCLR on older floating loans; repo-linked on most new floating loans.
• Introduced: MCLR in 2016; the repo-linked (external benchmark) regime in 2019.

Why this matters

Say the RBI cuts the repo rate by 1%. A repo-linked borrower usually gets the benefit at the next reset. An MCLR borrower might get the full cut, only part of it, or a delayed one, depending on when and by how much the bank revises its MCLR.

That is why two borrowers at the same bank can pay different rates after the same announcement.

Should you convert your loan?

Not always. A lower rate looks attractive, but switching benchmarks should turn on the overall benefit, not the headline number.

Ask yourself: is my current rate much higher, how many years are left, what conversion or processing fees apply, will the savings beat those fees, and does my repayment history earn me better pricing? The answer is different for every borrower.

Five questions to ask your lender

1. Which benchmark is my loan linked to?
2. When is my next interest rate reset date?
3. What is my current spread over the benchmark?
4. Can I switch to a different benchmark?
5. What charges or conversion fees will apply?

Most borrowers never ask, and keep paying more simply because they don't know their options. Before converting or switching lenders, compare the total cost of borrowing, including fees, not just the advertised rate.