RBI Repo Rate Cut: Home Loan Rates Drop, But New Borrowers May Not Get Full Benefit

The Reserve Bank of India (RBI) recently reduced the repo rate by 25 basis points (bps), bringing it down to 6.25% on February 7, 2025.

This marks the first repo rate cut in nearly five years, bringing relief to existing home loan borrowers. However, new borrowers may not fully benefit as banks have widened their spreads on interest rates.

With this move, several public sector banks quickly followed suit by lowering their lending rates. But due to various market factors, new home loan applicants may not see the same reduction as existing borrowers.

Let’s understand how this repo rate cut affects home loans and why new borrowers may not get the full advantage.

What is Repo Rate and Why is it Important?

The repo rate is the interest rate at which the RBI lends money to commercial banks in case of a shortage of funds. It plays a crucial role in determining the lending rates of banks, including those on home loans.

• When the RBI lowers the repo rate, borrowing becomes cheaper for banks, allowing them to reduce interest rates on loans.
• Conversely, when the repo rate increases, borrowing becomes expensive, leading to higher loan interest rates for consumers.

Since home loans are long-term financial commitments, even a small change in the repo rate can significantly impact EMIs (Equated Monthly Installments).

Impact of RBI Repo Rate Cut on Home Loan Borrowers

The recent 25 bps repo rate cut has different implications for different types of borrowers:

1. Existing Home Loan Borrowers (Repo Rate Linked Loans)

• Home loan borrowers who already have loans linked to the repo rate will benefit from this rate cut.
• As per RBI guidelines, banks must pass on the rate cut benefit to repo rate-linked home loans within three months.
• This means existing borrowers will see a reduction in their EMIs in the coming months.

2. New Home Loan Borrowers

• Although the repo rate has been reduced, new borrowers may not get the full benefit.
• Banks often increase their spread or margin to compensate for the lower interest rate, which could result in only a partial rate reduction for new borrowers.

How Repo Rate Cut Affects Home Loan Interest Rates?

Since October 1, 2019, all new floating-rate home loans have been linked to external benchmarks like the repo rate. This ensures transparency in interest rate changes and benefits borrowers when the repo rate decreases.

Key Factors That Affect Home Loan Interest Rates

1. Repo Rate Reduction – When the repo rate drops, banks should ideally pass on the benefits to borrowers.
2. Bank’s Spread & Margin – Banks adjust their margins to manage their profitability, which affects how much of the repo rate cut is passed on.
3. Loan Type & Tenure – Floating-rate loans respond to repo rate cuts, while fixed-rate loans remain unchanged.
4. Credit Score & Profile – Borrowers with higher credit scores (750+) may get lower interest rates than those with lower scores.

Why New Home Loan Borrowers May Not Get Full Benefit?

While existing borrowers will see a reduction in their EMIs, new borrowers may not get the same benefit due to the following reasons:

1. Banks Widening Their Spreads

• To maintain profitability, banks increase their spread (margin) over the repo rate.
• Even though the repo rate decreased by 25 bps, banks might not reduce the actual lending rate by the same margin for new borrowers.

2. Market Conditions & Bank Policies

• Individual banks have their own policies on interest rate transmission.
• Some banks may delay the full transmission of the repo rate cut, limiting the benefit for new applicants.

3. Creditworthiness of Borrowers

• New borrowers are assessed based on credit score, income stability, and financial profile.
• Those with lower credit scores (below 700) might not get the lowest rates despite the repo rate cut.

Current Home Loan Interest Rates After Repo Rate Cut

Here’s a look at the updated interest rates on home loans after the RBI’s repo rate cut:

Note: Rates may vary based on borrower profile and loan tenure.

How Can Borrowers Take Advantage of the Repo Rate Cut?

1. Existing Borrowers: Request Rate Reduction

• If your home loan is linked to the repo rate, your bank should automatically reduce the rate.
• Check with your bank to confirm the revised EMI and interest rate.

2. New Borrowers: Compare Loan Offers

• Research and compare interest rates from different banks before applying for a home loan.
• Choose a bank that offers the lowest spread over the repo rate.

3. Opt for Home Loan Balance Transfer

• If your current bank is not passing on the full benefit, consider a home loan balance transfer to a bank offering lower interest rates.

4. Improve Credit Score

• A higher credit score (750 and above) can help you negotiate better interest rates.
• Pay existing debts on time and avoid high credit utilization.

Conclusion: Should You Apply for a Home Loan Now?

The RBI’s repo rate cut has brought some relief to home loan borrowers, but new applicants need to be cautious. While existing borrowers will automatically benefit, new borrowers must carefully compare loan options and check for hidden costs before applying.

Key Takeaways:

✔ Existing home loan borrowers will see EMI reductions within three months.
✔ New borrowers may not get the full benefit due to widened bank spreads.
✔ Compare loan offers from different banks to secure the lowest interest rate.
✔ A higher credit score improves chances of getting lower interest rates.
✔ Consider a home loan balance transfer if your current bank is not reducing rates.

Before applying for a home loan, make sure to check your eligibility, negotiate interest rates, and explore multiple banks to maximize the benefits of the repo rate cut.