The Reserve Bank of India has cut the repo rate three times this year, bringing it down by a full percentage point. As a result, home loan rates have dipped below 8%, a level we haven’t seen since 2022. But despite these cuts, not everyone is seeing a difference in their EMIs.

If your loan instalment hasn’t budged, it might be time to look at the benchmark your loan is pegged to. This one detail can decide whether you benefit from rate cuts or miss out entirely.

What is a benchmark, and why does it matter?

The benchmark is the standardised rate to which your home loan is tied. Over this, the bank adds a fixed spread based on factors like your income, loan size, and credit score. The final interest rate you pay is the sum of the benchmark and the spread.

Now, why is this important? Because your benchmark decides how fast and how fully your lender passes on a policy rate cut. For instance, repo-linked loans tend to reflect changes promptly. They are designed to adjust automatically and frequently, so borrowers get the benefit without delays.

A recent report titled ‘Home Loans Made Easy’ rightly noted that having the right benchmark can help you save more and pay off your loan faster. And in the current rate cycle, that difference is starting to show.

Also read: Savings account rates cut: Check new interest rates of SBI, HDFC, ICICI, Canara Bank and others

How benchmarks have changed over the years

Before 2016, most home loans were linked to the Base Rate, which gave banks a lot of room to decide interest rates. Then came MCLR, introduced to improve transparency in how rates were calculated. While MCLR rates were tied to the repo, there was still ambiguity in how they were priced. Finally, in 2019, the RBI pushed lenders to adopt interest pricing schemes that were directly tied to external benchmarks, mainly the repo rate, for all new floating-rate loans.

As of December 2024, RBI data shows 60.4% of floating-rate home loans are linked to the repo rate. But a significant number, around 35.6%, are still on MCLR, and 2% on the Base Rate. That means over one-third of borrowers could be missing out on faster rate transmission.

Not all benchmarks are created equal

If your loan is repo-linked (via EBLR, RLLR, or RBLR), any change in the repo rate is passed on automatically. Banks are mandated to pass any changes to the interest rate within three months, so when the repo rate drops by 100 basis points, your rate could also drop by that much within a quarter.

Loans linked to MCLR take longer to adjust. If your reset happens only once every 6 to 12 months, any benefit from a rate cut may take time to reflect in your EMIs. The reduction may also be smaller since MCLR is based on the lender’s internal cost calculations.

Loans still tied to the Base Rate or PLR are even slower and don’t adjust automatically. It’s entirely up to the lender to decide if and when to reduce your rate. If your loan is still under this system, it may be time to explore a switch.

Also read: SBI cuts savings account, FD rates

Why does your loan benchmark matter?

With the repo rate now down to 5.5%, many borrowers with repo-linked loans are enjoying lower EMIs, shorter tenors, or both. Others, especially those on MCLR or Base Rate, may still be paying interest rates around 9% or higher.

Here’s a quick comparison. A ₹55 lakh loan at 9.25% (1-year MCLR + 0.25% spread) for 20 years would have an approximate EMI of ₹50,372. In contrast, a repo-linked loan, adjusted after the recent rate cut, at 7.35% for the same amount and tenure has an approximate EMI of ₹43,084. That’s a monthly saving of over ₹6500 and a total interest saving of nearly ₹15.76 lakh over the loan tenure.

Don’t ignore the spread

Even if your loan is repo-linked, your interest rate also includes a spread. This part doesn’t change. If your spread is high, repo cuts may not bring your rate down significantly. Say your lender has added a 3.00% spread that stays fixed through the loan tenure. If your total rate still feels high, you can request a reduction from your bank or refinance with a lender offering better terms.

How to check and what to do

You’ll find your benchmark in your loan sanction letter or through your bank’s mobile app or online portal. If you’re still on MCLR or Base Rate, ask about switching to a repo-linked rate. If your bank isn’t offering a favourable switch, a balance transfer to another lender might be the smarter move.

Rate cuts are only useful if your loan reflects them. If your benchmark is outdated or your spread is steep, you’re likely paying more than you need to. In a falling-rate environment, it’s worth taking a moment to review your loan terms. A small check today could mean big savings tomorrow and get you one step closer to a debt-free home.

The writer is CEO, BankBazaar.com

Disclaimer: The views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.