MCLR Rate vs. Repo Rate Explained: Which Is Better for a Home Loan?

Getting a home loan can be overwhelming, due to the fact that we need to make repayments through Equated Monthly Instalments (EMI). Interest is a percentage of the entire loan amount that we need to pay for availing the service. 

Table of Content

• Definition of MCLR Rate
• Definition of Repo Rate
• Differences Between MCLR and Repo Rate
• MCLR vs Repo Rate: Which is Better for Home Loan?

Even an insignificant change in interest rates can add up to a huge amount when you look at the borrowing costs as a whole. For this reason, the first thing that we need to consider is the lower interest rate on a home loan.

This is because a lower interest rate means a lower EMI. While choosing the best interest rates, simply focusing on the numbers is not enough. Banks and NBFCs offer you a home loan with either the Repo Linked Lending Rate (RLLR) or the Marginal Cost of Fund Based Lending Rate (MCLR).

Whether you are actively or tentatively looking to purchase a home, you must have a better understanding of the terms & conditions associated with availing home loans. In this blog, we will go through the differences between the Repo rate and the MCLR and their influence on home loans.

Definition of MCLR Rate

The Marginal Cost of Funds Based Lending Rate is known as MCLR. It is the rate below which lenders are not allowed to offer the borrowers. The Reserve Bank of India (RBI) implemented MCLR with an aim to ensure efficiency and transparency while determining the interest rates by banks. It considers a number of variables, such as the tenor premium, operating expenses, marginal cost of funds, etc.

Banks periodically adjust MCLR rates, which is known as a reset period, ranging from 6 to 12 months. It is done in response to the shifts in their funding costs and repo rates. Although the MCLR is impacted by the repo rate, the two are not the same.

Definition of Repo Rate

The Repo Linked Loan Rate is known as RLLR. It is the loan rate that is linked to the repo rate set up by the Reserve Bank of India (RBI). When commercial banks go through a shortage of funds, they borrow money from the RBI and the rate at which the RBI lends money is known as the repo rate. This, in return, serves as a mechanism for regulating market liquidity and controlling inflation.

Determining the repo rate depends on factors such as the loan amount, risk groups, etc. Interest rates on home loans are subject to change based on the change in the repo rate. For instance, a lower repo rate by the RBI makes it less expensive for commercial banks to borrow money. On the other hand, borrowing costs may rise significantly when the RBI increases the repo rate.

Suggested Read: Reverse Repo Rate vs. Repo Rate: Key Differences You Must Know

Differences Between MCLR and Repo Rate

1. Rate Determination

MCLR is set by the bank, adhering to the guidelines set by the RBI. Whereas the repo rate is determined by the RBI.

2. Influencing Factors

MCLR is influenced by bank-specific factors. However, the repo rate is influenced by broader economic factors.

3. Revision Period and Impact

MCLR is revised periodically, and its impact affects the loans offered by the respective banks. Whereas, the repo rate changes frequently, i.e. every 3 months, and its impact affects the lending rates across all banks.

4. Rate of Transmission

Since the waiting period for MCLR interest rates is longer. As a borrower, it gives you enough time to adjust to the changes in interest rates so that you can manage your finances better. Repo rates change quickly, and this changes the interest rates that reflect on your EMI.

Suggested Read: Home Loan Requirements: Essential Documents & Criteria

MCLR vs Repo Rate: Which is Better for Home Loan?

• For Transparency: Interest rate in MCLR is a calculation based on a lender’s internal business, making it difficult for individuals to understand the reasons for a particular interest rate. The Repo rate is available for the public to see, making it a better choice due to the transparency.
• For Stability: MCLR loan rates in home loans are a superior choice in terms of stability. This is because every change in the repo rate affects the interest rates linked to the home loan. The change in interest rates could make it difficult for you to make financial arrangements in the event of an increased repo rate.
• For Savings: The tenure on home loans is usually longer, so it would be ideal if you could save some money by availing a lower interest rate on your home loan. This can be done by choosing the RLLR, because the interest rate decreases significantly as the repo rate falls. Whereas, this drop in the repo rate does not affect the interest rate in the MCLR rate-dependent home loan.

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