Personal Finance

Home Loan Interest Rate: A Rate Hike May Be 16 Days Away. Switch or Wait?

The RBI held the repo rate at 5.25% in August, but MCLRs are already rising and economists expect a hike on 7 October. When switching lenders pays, and when it doesn't.

By The Indian Markets Desk 11 min read

The repo rate has not moved since December. Your EMI still might#

The Reserve Bank of India's Monetary Policy Committee last changed the repo rate on 5 December 2025. That month it made the fourth cut of a cycle that took the rate from 6.50% to 5.25%, a total of 125 basis points during 2025. It has sat there through three meetings since. On 5 August 2026 the committee voted unanimously to hold at 5.25% with a neutral stance, and cut its inflation forecast for 2026-27 slightly, from 5.1% to 5.0%.

The next decision comes at the meeting of 5 to 7 October, and the mood has turned. Retail inflation climbed from 4.45% in July to 4.82% in August, with crude above $100 a barrel. HSBC's Pranjul Bhandari expects hikes of 25 basis points in both October and December. Emkay Global's Madhavi Arora expects one in October. India Ratings expects a hold.

For anyone with a floating-rate home loan, the question is whether to move to a cheaper lender now or wait. The answer depends less on the RBI than most borrowers think.

Repo, EBLR and MCLR: the three numbers behind your rate#

The repo rate is what the RBI charges banks for overnight money. A basis point is one hundredth of a percentage point, so 25 basis points is 0.25%.

Since 1 October 2019, every new floating-rate home loan from a bank must be tied to an external benchmark, in practice almost always the repo rate. That is your EBLR, the external benchmark lending rate. The RBI's rule is blunt: the rate "shall be reset at least once in three months". Your loan rate is the benchmark plus a spread. The spread can change only if your credit profile changes substantially, while the lender's other costs built into it can be revised only once in three years.

SBI's own figures show how it is built. Its EBLR has stood at 7.90% plus a credit risk premium and a bank-specific premium since 15 December 2025, down from 8.15% before the December cut. HDFC Bank prices its adjustable-rate home loans at policy repo plus 2.50% to plus 7.95%, which works out to 7.75% to 13.20%. That is a range of more than five percentage points on one product at one bank.

Older loans, and many from housing finance companies, are linked instead to the MCLR, the marginal cost of funds based lending rate. The MCLR follows what the bank pays for deposits and borrowings. It moves more slowly, and it does not wait for the RBI.

Transmission was partial, and MCLRs are already rising#

The 125 basis point cut did not reach borrowers in full. CareEdge Ratings found that rates on fresh housing loans fell by 92 basis points, and on outstanding housing loans by 99 basis points. The RBI's July Bulletin showed that the pass-through also varied by type of bank. On fresh loans, foreign banks cut their average lending rate by 1.24 percentage points, private banks by 1.08 and public sector banks by only 0.66.

The reverse has now started. In June alone, five banks raised their MCLRs, Bank of Baroda, Canara Bank, HDFC Bank, Bank of Maharashtra and Indian Overseas Bank among them, pointing to "liquidity and other cost-related challenges". RBI data show the median one-year MCLR at 8.70% in August, up from 8.60% in July. Federal Bank's one-year MCLR is 9.00% from 16 September. The average rate on all outstanding bank loans was 8.97% in July, against 8.52% on fresh ones. That 45 basis point gap is roughly what existing borrowers are paying for being existing borrowers.

My reading, and it is interpretation rather than fact: if you are still on an MCLR loan, your rate is drifting upwards with no RBI decision at all. An EBLR loan at least moves only when the repo rate does.

What a quarter point does to a ₹50 lakh loan#

The chart shows the monthly instalment (EMI) on a ₹50 lakh loan with 20 years left, at different rates.

Monthly EMI on ₹50 lakh over 20 years

  7.25%  ₹39,519  ██████████████████████████
  7.50%  ₹40,280  ███████████████████████████
  7.75%  ₹41,047  ███████████████████████████▌
  8.00%  ₹41,822  ████████████████████████████
  8.50%  ₹43,391  █████████████████████████████
  9.00%  ₹44,986  ██████████████████████████████
  9.50%  ₹46,607  ███████████████████████████████
                  └─────────┴─────────┴─────────┘
                  ₹0     ₹15,000   ₹30,000  ₹45,000

Author's calculation. Bars start at zero. Fees, insurance and tax benefits are excluded.

Every 25 basis points adds roughly ₹760 to ₹810 a month. If you are on 7.75% and the repo rises by 25 basis points, your bank will usually keep the EMI the same and stretch the loan by roughly 12 months. A 50 basis point rise stretches it by about 25 months. Under the RBI's 2023 rules on floating-rate resets, the lender must tell you about the change and offer you the choice between a higher EMI, a longer tenure or both. Where its board policy allows, it may also offer a switch to a fixed rate. It must also send a quarterly statement showing the EMIs left and your annualised rate.

Should you switch lenders or sit tight?#

A hike follows you to any bank#

This is the point most "switch now" advice leaves out. If the repo rises on 7 October, every EBLR loan in the country resets upwards within three months, including the one you just moved to. A balance transfer does not protect you from the RBI. What it changes is your spread, and your spread stays with you whichever way the repo moves.

So the useful comparison is your current rate minus 5.25%, set against what a new lender would charge you over 5.25%. SBI advertises home loans from 7.25%, a spread of 2.00 percentage points, for its best-rated borrowers. If you are paying 9%, you are carrying a spread of 3.75. Someone who took a loan in 2023 at a high spread and never renegotiated could be in exactly that position.

Run the break-even before you run to the branch#

Take that 9% borrower with ₹50 lakh and 20 years to go. Moving to 7.75% cuts the EMI by about ₹3,939 a month, or roughly ₹9.45 lakh over the full term. Assume the move costs ₹40,000 in processing fee, legal and valuation charges and, in many states, stamp duty on a new mortgage. That is an illustrative figure, since fees vary by lender and state. The saving covers it in about 10 months.

Now take someone paying 8.00% who could get 7.75%. The monthly saving is about ₹775. The same ₹40,000 takes more than four years to recover. For a gap that small, start by asking your own bank to reprice you. The 2019 circular already gave older borrowers the right to move to the external benchmark at the rate charged on a comparable new loan.

Leaving is cheaper than it used to be. Under the RBI's prepayment directions of July 2025, lenders cannot charge individuals any prepayment penalty on floating-rate loans taken for non-business purposes, whatever the source of the money. The rule covers loans sanctioned or renewed from 1 January 2026.

Who should probably wait#

Some borrowers have little to gain. That includes anyone whose spread is already within 25 to 50 basis points of the best offer, anyone with under five years left, where interest is a small part of each EMI, and anyone whose credit score has slipped since the original loan. The last group may find the new lender quotes a spread no better than the current one. Self-employed borrowers and freelancers should get a written sanction letter before starting. HDFC Bank, for one, prices salaried and self-employed applicants separately.

Nobody knows what the RBI will do on 7 October, and a hold is still possible. The decision to switch should not rest on that guess.

Key takeaways#

  1. The repo rate has been 5.25% since December 2025, after 125 basis points of cuts in 2025. Housing loan rates fell by only about 92 to 99 basis points.
  2. Banks raised MCLRs from June, and the median one-year MCLR reached 8.70% in August. MCLR borrowers are paying more without any RBI move.
  3. Economists are split on the 5 to 7 October meeting. Several expect a 25 basis point hike, India Ratings expects a hold.
  4. A repo hike reaches every EBLR loan within three months, at any bank. Switching lowers your spread, not your exposure to the RBI.
  5. Work out your spread over 5.25% and the break-even on switching costs. A gap of one percentage point or more usually pays back within a year. A gap of 25 basis points rarely does.

Frequently asked questions#

Will my EMI rise straight after an RBI hike? Not on the same day. EBLR loans reset at least once every three months, so the change arrives at your next reset date. Banks usually extend the tenure first unless you ask them to raise the EMI instead.

Is a fixed-rate home loan safer now? It depends on the price. Under the 2023 rules your lender may offer a switch to a fixed rate, and must disclose the charges in the sanction letter. Compare the fixed rate on offer with your floating rate plus the hikes you think likely.

Can my bank charge me for closing the loan early? Not if you are an individual with a floating-rate loan for a non-business purpose. The RBI's 2025 directions bar prepayment charges on such loans sanctioned or renewed from 1 January 2026.

What is a good spread over repo? Top-rated salaried borrowers currently get around 2.00 to 2.50 percentage points, going by the starting rates of SBI and HDFC Bank. Spreads above 3.00 are worth questioning.

Does a balance transfer hurt my credit score? Any new loan application shows up as an enquiry on your credit report. Ask your credit bureau how it treats enquiries before making several applications at once.

Should I prepay instead of switching? Prepaying reduces the principal, so it saves interest at whatever rate you pay. Switching lowers the rate itself. With no prepayment penalty on individual floating-rate loans, many borrowers can do both.

Glossary#

Repo rate. The rate at which the RBI lends overnight to banks. It is the benchmark for most new floating home loans.

Basis point. One hundredth of a percentage point. 25 basis points is 0.25%.

EBLR. External benchmark lending rate: a loan rate set as an outside benchmark, usually the repo rate, plus a spread. It must reset at least every three months.

MCLR. Marginal cost of funds based lending rate, an internal benchmark built from a bank's own borrowing costs. It is used for older loans.

Spread. The margin a lender adds over the benchmark. It reflects your credit risk and the lender's costs.

Balance transfer. Moving an outstanding home loan to another lender, which pays off the old one.

Transmission. How much of a change in the repo rate reaches the rates banks actually charge and pay.

WALR. Weighted average lending rate, the RBI's measure of the average interest rate banks charge on loans.

References#

This article is journalism, not financial advice. EMI figures are the author's calculations for illustration. Rates, fees and RBI decisions change; check your own sanction letter and current lender quotes, and consult a qualified adviser about your circumstances.

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