For the first time in 5 years, the Reserve Bank of India (RBI) announced a cut in the repo rate by 25 basis points (bps) bringing it to 6.25% on February 7, 2025. This decision was passed under the RBI’s governor Sanjay Malhotra. This comes as a relief for borrowers, but what does it really mean for your home loan EMIs? Let’s break it down.
Repo Rate and Its Importance
Repo rate, also known as repurchase rate, is the rate of interest at which the RBI lends money to the commercial banks. When the repo rate increases, various banks also increase their rate of interest on home loans and personal loans. Conversely, when this repo rate decreases, most banks decrease the home loan interest rates as well as on other loans provided to businesses and individuals as they can borrow from the RBI at a lower cost. This is mainly done to maintain the inflation.
Impact of Repo Rate on Home Loans
Whether there is an increase or decrease in the repo rate, it may impact your home loans in some ways. When the repo rate goes down, banks can borrow money at a lower cost, which often leads to lower interest rates on home loans. This can result in lower EMIs for existing borrowers and make home loans more affordable for new buyers.
Should You Consider Refinancing Your Home Loan?
Consider this example – If you have a home loan of Rs.1 crore at 9.5% interest for 15 years, with 7 years now remaining, refinancing to a new lender that offers 8.5%, then your EMI could reduce from Rs.1,04,422 to Rs.95,565, saving Rs.8,857 every month and approximately 62,000 for the remaining loan tenure.
If you have an existing loan with high-interest rates, refinancing to a lower rate could help save money. Consider switching your loan to a lender offering lower interest rates, especially if:
- The new interest rate is significantly lower than your current rate
- Your remaining loan tenure is long enough to benefit from the reduced interest
- The cost of transferring the loan is minimal compared to the savings
All these points must be considered before you decide to refinance your home loan.
Note: Use Home loan EMI calculator to know your accurate EMI
How Soon Will Banks Pass on the Benefit?
Most banks take some weeks or as long as months to pass on the benefits of repo rate cuts to the customers. Make sure to keep an eye on your bank’s rate announcements to make informed financial decisions.
Conclusion
An RBI repo rate cut can bring good news for home loan borrowers, particularly those with floating interest rate loans. However, banks may take time to adjust their rates, and fixed-rate borrowers may not see immediate benefits. If your bank passes on the rate cut, you could enjoy lower EMIs and reduced financial burden.
For existing borrowers, it is always wise to monitor market trends and consider refinancing options if better loan deals become available. If you are planning to take a new home loan, a repo rate cut makes it an ideal time to secure a loan at lower interest rates.
