Last Updated:
A cut in the repo rate will now prompt banks to lower their lending rates, making home loans more affordable.
Home Loan EMI To Decrease
In a major relief to home loan borrowers, the RBI reduced the repo rate by 25 basis points in its monetary policy meeting on February 7, 2025. This marks the first rate cut in nearly five years, a period during which home loan rates either remained stagnant or were increased. Following the RBI’s repo rate cut, home loan lenders are expected to lower interest rates on floating-rate home loans.
What Should Home Loan Borrowers Do?
A 0.25% reduction in interest rates offers home loan borrowers two options: they can either reduce their EMIs or shorten the loan tenure, allowing them to pay off their home loan faster. For instance, on a Rs 30 lakh loan with a 20-year tenure, if the interest rate drops from 9% to 8.45%, the EMI will decrease from Rs 26,992 to Rs 26,551, resulting in a reduction of Rs 480 or 1.78%.
Adhil Shetty from Bankbazaar.com explains, “Let’s say you took a loan of Rs 50 lakh one year ago at 9% for 20 years. The total EMI paid over the life of the loan would be approximately Rs 58 lakh. With a repo rate cut, the entire reduction is passed on. Typically, the bank will keep your EMI the same, meaning you save on total interest and reduce your loan tenure.” For example, if the rate cut is 50 basis points, the loan rate would reset to 8.5%, resulting in a savings of Rs 8 lakh and reducing the loan tenure by 18 months to 222 months. With a 25 basis points cut, the loan tenure would reduce by 10 months, bringing the total interest paid to Rs 53.6 lakh, saving Rs 4.4 lakh over the course of the loan.
| Loan Amount | Initial Interest Rate | Tenure | Total EMI Paid (Before Rate Cut) | Rate Cut | New Interest Rate | New Total Interest | Interest Savings | New Tenure | Tenure Reduction |
|---|---|---|---|---|---|---|---|---|---|
| ₹50L | 9% | 20 years (240 months) | ₹58L | 50 bps (0.50%) | 8.5% | ₹50L | ₹8L | 222 months | 18 months |
| ₹50L | 9% | 20 years (240 months) | ₹58L | 25 bps (0.25%) | 8.75% | ₹53.6L | ₹4.4L | 230 months | 10 months |
Credit: Bankbazaar.com
“This was long overdue for homebuyers, who have been facing pressure from high EMIs and interest rates on home loans for over two years,” said Prakash Darekar, chairman of the Mumbai District Cooperative Housing Federation.
A low-interest rate environment during the COVID-19 era fueled a surge in homeownership, allowing banks and financial institutions to offer affordable credit, with home loan interest rates often staying below 7% throughout much of 2021 and part of 2022.
However, the RBI began raising the repo rate, the rate at which it lends to commercial banks, in June 2022, which led to an increase in home loan interest rates as financial institutions found less room to maneuver.
Industry estimates suggest that EMIs for those with floating-rate mortgages have risen by over 20%.
Currently, most banks and lenders are offering home loans with interest rates around 9% per annum, experts noted.
Rajesh Katoch, CEO of EZ Capital, explained, “Borrowers, particularly those with floating interest rate loans, will benefit from lower lending rates due to the reduced repo rate. This will make loans more affordable, and consequently, EMIs for home and personal loans will decrease, easing the financial burden on households.”
He added, “For these benefits to reach borrowers, individual banks have the discretion, and the type of interest rate on the loan matters—fixed-rate loans are unaffected by repo rate cuts.”
‘Lower home loan interest rates will offer much-needed relief to homebuyers’
Manju Yagnik, Vice Chairperson of Nahar Group and Senior Vice President of NAREDCO-Maharashtra stated that the RBI’s decision to reduce the repo rate by 25 basis points to 6.25% is a positive move for the real estate sector, especially as it marks the first rate cut since February 2023. She emphasized that lower home loan interest rates will offer much-needed relief to homebuyers, making property purchases more affordable by reducing EMIs. According to Yagnik, this move is expected to stimulate demand for housing, increase market activity, and encourage greater investment in real estate. She also noted that it would boost confidence among both buyers and developers, fostering a stronger and more dynamic sector. Developers will benefit from easier access to funds, enabling them to complete projects more quickly and meet growing demand. Furthermore, Yagnik highlighted that the decision aligns with the government’s focus on economic growth, ensuring long-term stability in the housing sector. She concluded that this rate cut is a crucial push that will benefit both homebuyers and developers, driving positive momentum in real estate.
