Still on an MCLR Home Loan in Bengaluru? What RBI External Benchmark Rules Mean After the Hike
RBI rules have tied new floating rate bank home loans to an external benchmark since October 2019. Here is how Bengaluru borrowers on older MCLR loans can judge a switch after the October 2026 repo hike.
Some Bengaluru homeowners who took a bank home loan before October 2019 are still paying a rate linked to the bank's marginal cost of funds based lending rate, or MCLR. Their neighbours who borrowed later are on loans tied to an external benchmark such as the RBI's repo rate. When the RBI raised the repo rate by 25 basis points to 5.50 percent on 7 October 2026, those two groups started down different paths. Which one are you on, and is it worth moving?
This guide explains what the RBI's external benchmark rules actually say, how they treat existing borrowers, and how to run the numbers on a switch without guessing where rates go next.
The short answer. Under RBI circular RBI/2019-20/53, all new floating rate retail loans from banks, including housing loans, have had to be linked to an external benchmark such as the repo rate since 1 October 2019, with the rate reset at least once in three months. Existing MCLR linked loans continue until repayment or renewal, and borrowers can move to an external benchmark loan, in some cases with only reasonable administrative or legal costs. The trade-off: a repo linked bank loan passes rate changes through within a quarter, in both directions, which is welcome when rates fall and less so after a hike like October's, so a switch should be judged on the spread you are offered, not on the direction of the next move.
What do the RBI's external benchmark rules require?
The rules come from the RBI circular on External Benchmark Based Lending, reference DBR.DIR.BC.No.14/13.03.00/2019-20, dated 4 September 2019. Under it, all new floating rate personal or retail loans, naming housing and auto loans, and floating rate loans to micro and small enterprises extended by banks from 1 October 2019 are to be benchmarked to one of a short list of external benchmarks.
A note on sources: the RBI's website now lists this circular among its withdrawn circulars, and the RBI has since issued consolidated Master Directions, including Responsible Business Conduct Directions, 2025, for lenders. The requirements described here are drawn from the circular's text; confirm the current wording with your lender or the RBI's Master Directions before relying on a specific detail.
Those benchmarks are the RBI policy repo rate, the Government of India three month or six month Treasury Bill yields published by Financial Benchmarks India, or any other benchmark market interest rate published by Financial Benchmarks India. Banks are to adopt a uniform external benchmark within a loan category, so your bank should not be using different benchmarks for different home loan customers.
The circular also sets two rules that matter to borrowers. The interest rate under an external benchmark shall be reset at least once in three months. And while banks set the spread over the benchmark, the credit risk premium may change only when the borrower's credit assessment undergoes a substantial change, while other components of the spread, including operating cost, can be altered once in three years.
Does this rule cover housing finance companies?
Read the addressees carefully. The circular is addressed to all scheduled commercial banks excluding regional rural banks, all small finance banks and all local area banks. Housing finance companies are not on that list.
So if your home loan is from a housing finance company rather than a bank, this particular circular does not set your benchmark or reset terms. Your loan agreement does. Check it for the benchmark name, how the lender revises that benchmark, and how often your rate resets. Our guide to fixed versus floating home loans in Bengaluru covers the wider choice between rate types.
| Point in the 2019 circular | What it says | What it means for you |
|---|---|---|
| Loans covered | New floating rate retail loans, including housing, from banks from 1 October 2019 | Bank home loans taken since then should name an external benchmark |
| Permitted benchmarks | Repo rate, three or six month Treasury Bill yields, or another FBIL published rate | Find which one your loan uses |
| Reset | At least once in three months | A repo change should reach your rate within a quarter |
| Spread | Credit risk premium changes only on a substantial change in credit assessment; other parts once in three years | Your spread should not drift without a reason |
| Existing MCLR loans | Continue until repayment or renewal; option to switch, not treated as foreclosure | You can ask to move, and compare the terms first |
Can an existing MCLR borrower switch, and at what cost?
Yes, though the terms depend on your situation. Under the circular, existing loans and credit limits linked to MCLR, base rate or benchmark prime lending rate continue till repayment or renewal. Borrowers who are eligible to prepay a floating rate loan without any charges can switch to an external benchmark without any charges or fees, except reasonable administrative or legal costs, and the final rate they get is to be the same as for a new loan of the same category, type of interest rate, tenor and amount at the time of switchover.
Other existing borrowers have the option to move to an external benchmark at mutually acceptable terms. The circular also says the switchover is not to be treated as a foreclosure of the existing facility.
In practice, that means you can ask your bank what rate it would offer you on its current external benchmark loan for your outstanding balance and remaining tenure, and what one time costs apply. Get both numbers in writing before deciding.
How do you work out whether switching is worth it?
Do not try to forecast the repo rate. Compare the spread. The question is whether the rate the bank offers you on an external benchmark loan today is lower than your current MCLR linked rate, and by how much.
Here is an illustrative example. Suppose you have 60 lakh rupees outstanding with 15 years left, on an MCLR linked rate of 8.90 percent, and your bank offers an external benchmark rate of 8.25 percent. Your EMI would fall from about 60,500 rupees to about 58,208 rupees, a saving of about 2,291 rupees a month. Over the remaining 180 months, that is about 4.1 lakh rupees less interest. If the one time switch cost were 10,000 rupees, you would recover it in under five months.
If the offered rate were 8.50 percent instead, the EMI would be about 59,084 rupees, still about 1,416 rupees a month lower than at 8.90 percent. But if the offered rate were close to or above your current rate, the switch would make little sense, whatever you think rates will do next.
Two cautions. First, a repo linked bank rate resets at least once in three months, so a hike like the one on 7 October 2026 will reach it within a quarter. Over the long run, faster pass through works in both directions. Second, check the new spread carefully, because under the circular the other components of the spread can be revised once in three years. A low headline rate today built on a wide spread is not the same as a low spread.
The spread is easy to see once you write it down. If a repo linked loan is offered at 8.25 percent while the repo rate is 5.50 percent, the spread is 2.75 percentage points. When the repo rate moves, that spread is what stays with you, subject to the revision rules above. Two offers at the same headline rate today, one with a 2.75 point spread and one with a 3.00 point spread on a different benchmark, will not stay level for long.
If your own bank's offer is not attractive, you are not limited to it. Collect Key Facts Statements from other lenders for your outstanding balance and remaining tenure, and compare the full cost, including any fees for moving the loan, against staying put. A switch within your own bank and a move to another lender are different exercises, but the arithmetic is the same: monthly saving against one time cost.
What should a Bengaluru borrower check this month?
The October 2026 Monetary Policy Committee resolution raised the repo rate to 5.50 percent and scheduled the next meeting for 2 to 4 December 2026. That makes this a sensible moment to know exactly what your loan is tied to.
- Find the benchmark named in your loan agreement: MCLR, repo rate, a Treasury Bill yield or a lender benchmark.
- Note whether your lender is a bank or a housing finance company.
- Write down your current rate, outstanding balance and remaining tenure.
- Ask your bank for a written quote on its current external benchmark home loan for that balance and tenure.
- Ask what one time administrative or legal costs apply to a switch.
- Compare EMIs and total interest at both rates, and calculate how many months the switch cost takes to recover.
- Check how the new spread is built and when components can be revised.
If you are still buying, these questions belong in your lender comparison from the start. Before you book in a project such as Godrej Thanisandra, ask each bank which external benchmark it uses and what spread it is offering you. Our explainer on how the October repo rate change affects Bengaluru EMIs walks through the EMI arithmetic.
What do borrowers ask most about MCLR and repo linked loans?
Are all home loans in India linked to the repo rate?
Not all. Under RBI circular RBI/2019-20/53, new floating rate retail loans from banks, including housing loans, have been linked to an external benchmark since 1 October 2019. Banks can choose the repo rate, Treasury Bill yields or another FBIL benchmark, and older MCLR loans continue until repayment or renewal.
How often does a repo linked home loan rate change?
The RBI circular says the interest rate under an external benchmark shall be reset at least once in three months. So a change in the repo rate should reach a repo linked bank home loan within a quarter. Your loan agreement states the exact reset dates, so check it for your own loan.
Can I move my old MCLR home loan to a repo linked rate?
Yes. Under the RBI circular, existing MCLR borrowers can switch to an external benchmark. Those eligible to prepay without charges can switch paying only reasonable administrative or legal costs. Others can switch at mutually acceptable terms, and the switch is not treated as a foreclosure of the existing loan.
Does the external benchmark rule 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. Housing finance companies are not among its addressees, so if your loan is from one, your loan agreement sets the benchmark and how often the rate resets.
Last updated 2026-10-16. PropNewz Team.
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