Repo Rate Plus Spread: RBI Rules on When Your Bengaluru Home Loan Spread Can Change
A repo-linked home loan rate has two parts: the benchmark, now 5.50 per cent, and the bank's spread. Under the RBI's 2019 external benchmark circular, the credit risk premium changes only on a substantial change in credit assessment and other spread components once in three years. What Bengaluru borrowers should check.
When the repo rate rose to 5.50 per cent in October 2026, the obvious sum for a Bengaluru borrower was 25 basis points more on the benchmark and a little more on the EMI. The other half of the interest rate, the spread the bank adds on top of the benchmark, gets less attention. On a repo-linked loan, if your spread is 2.75 percentage points, your rate is 5.50 plus 2.75, or 8.25 per cent. The repo part moves with RBI policy. The spread part is set by your bank, and the RBI's rules decide when it can change.
This explainer sets out those rules, what they mean for a borrower whose loan is still on an older internal benchmark, and the questions to ask before you sign or renew.
The short answer. Under the RBI's External Benchmark Based Lending circular of 4 September 2019, new floating rate housing loans from banks since 1 October 2019 must be linked to an external benchmark, such as the repo rate, and reset at least once in three months. Banks are free to decide the spread, but the credit risk premium may change only when the borrower's credit assessment undergoes a substantial change, as agreed in the loan contract, and other spread components, including operating cost, can be altered once in three years. The trade-off: an external benchmark passes policy changes through within a quarter, hikes as well as cuts, while the spread you accept at sanction can stay with you for years.
How is a repo-linked home loan rate built?
Benchmark plus spread. The RBI circular on External Benchmark Based Lending decided that all new floating rate personal or retail loans, including housing loans, extended by banks from 1 October 2019 shall be benchmarked to one of four rates: the RBI policy repo rate, the Government of India 3 month Treasury Bill yield published by FBIL, the 6 month Treasury Bill yield published by FBIL, or any other benchmark market interest rate published by FBIL.
The circular also requires a bank to adopt a uniform external benchmark within a loan category. In other words, a bank cannot use multiple benchmarks for the same category of loan, which keeps products comparable. It adds that there shall be no lending below the benchmark rate for a particular maturity for loans linked to that benchmark.
The current benchmark value for repo-linked loans comes from the RBI. The minutes of the Monetary Policy Committee meeting held from 5 to 7 October 2026 record a unanimous vote to raise the policy repo rate by 25 basis points to 5.50 per cent.
When can a bank change the spread on my loan?
Only in limited ways. The circular says banks are free to decide the spread over the external benchmark. However, the credit risk premium may undergo change only when the borrower's credit assessment undergoes a substantial change, as agreed upon in the loan contract. Other components of the spread, including operating cost, could be altered once in three years.
That gives a borrower two things to look for in the loan documents. First, what the contract says counts as a substantial change in credit assessment. Second, when the three year window for other spread components started. If your rate moves at a time that is not a benchmark reset, ask the bank which of these two the change relies on, and ask for the clause in writing.
| Element | What the 2019 RBI circular says | What to check in your loan |
|---|---|---|
| External benchmark | Repo rate, 3 month or 6 month Treasury Bill yield by FBIL, or another FBIL benchmark | Which benchmark your sanction letter names |
| Uniform benchmark | One external benchmark per loan category at a bank | That the same benchmark applies to your product |
| Credit risk premium | Changes only on a substantial change in credit assessment, as agreed in the contract | What the contract defines as that change |
| Other spread components | Can be altered once in three years | When the three year period began |
| Reset | At least once in three months | Your next reset date |
What if my older loan is on MCLR or base rate?
It continues, but you may be able to switch. The circular says existing loans and credit limits linked to the MCLR, Base Rate or BPLR shall continue until repayment or renewal. Floating rate term loans sanctioned to borrowers who are eligible to prepay a floating rate loan without pre-payment charges shall be eligible to switch to the external benchmark without any charges or fees, except reasonable administrative or legal costs.
For those borrowers, the final rate after the switch shall be the same as the rate charged for a new loan of the same category, type, tenor and amount at the time of origination of the loan. Other existing borrowers have the option to move at mutually acceptable terms. The circular also says the switch-over shall not be treated as a foreclosure of the existing facility.
The RBI's reason for the change is stated in the circular: an internal study group had found that internal benchmarks such as the Base Rate and MCLR had not delivered effective transmission of monetary policy. Before switching, compare your current all-in rate with the rate you would get on the external benchmark today, and remember that a repo-linked loan will move with every policy change from here on.
How does the spread affect my EMI over the long run?
More than a single rate hike does. On a 20 year loan, every 25 basis points of rate changes the EMI by roughly Rs 156 for every Rs 10 lakh borrowed, as our worked example on EMI math at a 5.50 per cent repo rate shows. A repo move applies to everyone. A difference in spread applies to you alone, for as long as the spread stays the same, which under the circular can be years.
A worked example makes the point. Take two Bengaluru buyers who each borrow Rs 75 lakh over 20 years on the same day, with the repo rate at 5.50 per cent. One negotiates a spread of 2.50 percentage points, for a rate of 8.00 per cent. The other accepts 3.00 points, for 8.50 per cent. In a PropNewz calculation, the first pays an EMI of about Rs 62,733 and the second about Rs 65,087, a gap of about Rs 2,354 a month. If both rates stayed where they are for the full term, the second buyer would pay roughly Rs 5.65 lakh more over 240 months, with total interest of about Rs 81.2 lakh against about Rs 75.6 lakh.
Repo changes would move both loans by the same amount, so the gap between them would persist through every reset. Only a change to one buyer's spread, under the limited conditions in the circular, or a switch of lender, would close it. Half a percentage point of spread, agreed in an afternoon at the bank, adds about as much to the EMI as two 25 basis point repo hikes, and unlike a hike it applies only to you and does not reverse when policy eases.
That is why the spread is worth comparing across lenders at sanction, alongside processing fees and other charges. Our earlier explainer on EMI reset options after the repo rate reached 5.50 per cent covers what happens at each reset. If you are financing a flat in a project such as Godrej Woodland on Sarjapur Road, ask each lender for the benchmark and spread separately rather than a single headline rate.
What should a Bengaluru borrower ask the bank?
Ask for the parts, not just the total. These questions follow the structure of the RBI circular.
- Which external benchmark is my loan linked to, and what is its value on the sanction date?
- What is my spread over that benchmark, split into credit risk premium and other components?
- What does my loan contract define as a substantial change in my credit assessment?
- When does the current three year period for other spread components end?
- What is my reset frequency, and when is the next reset date?
- If my loan is on MCLR or base rate, what rate would apply on switching, and what administrative costs are charged?
- Will the bank confirm all of the above in writing before I sign or switch?
Does this apply to housing finance companies?
The 2019 circular is addressed to scheduled commercial banks (excluding regional rural banks), small finance banks and local area banks. If your loan is from a housing finance company or another lender, read your sanction letter and loan agreement for the benchmark and spread terms, and ask the lender which rules it follows for resets and spread changes.
The October hike is a good moment to look at the full structure of your rate. The repo part will keep moving with policy. The spread is the part you agreed to, and the part worth understanding before the next reset.
Frequently asked questions
Can my bank increase the spread on a repo-linked home loan?
Under the RBI's 2019 external benchmark circular, banks set the spread, but the credit risk premium may change only when the borrower's credit assessment undergoes a substantial change, as agreed in the loan contract. Other spread components, including operating cost, can be altered once in three years.
Which benchmarks can a bank use for a floating rate home loan?
The RBI circular lists the policy repo rate, the Government of India 3 month and 6 month Treasury Bill yields published by FBIL, and any other benchmark market interest rate published by FBIL. A bank must use one uniform external benchmark within a loan category.
Can I move my MCLR home loan to a repo-linked rate?
The circular says MCLR, Base Rate and BPLR loans continue until repayment or renewal. Floating rate borrowers eligible to prepay without charges can switch to the external benchmark without fees except reasonable administrative or legal costs, and the switch is not treated as a foreclosure of the existing loan.
How often must a repo-linked home loan rate be reset?
The RBI circular on external benchmark based lending says the interest rate under an external benchmark shall be reset at least once in three months. With the repo rate raised to 5.50 per cent in October 2026, check your loan's next reset date in the sanction letter.
Last updated 2026-10-25. PropNewz Team.
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