Table of Contents:
- Introduction
- Understanding the Repo Rate and Basis Points
- Impact of a 25-Basis Point Cut on Home Loans
- Should You Lower EMIs or Shorten Loan Tenure?
- Conclusion
- FAQs
If you’ve been keeping an eye on the news recently, you might have heard about the Reserve Bank of India (RBI) cutting the repo rate by 25 basis points on February 7, 2025. When this rate goes down, it can have a direct impact on lending rates, especially for home loans. In simpler terms, this change could lighten your financial load, whether you’re planning to buy your first home, or you’ve already been paying EMIs.
The RBI has directed banks to offer borrowers two options in response to such changes. The borrower can either lower their EMIs or shorten the loan tenure. But which is the best choice? This blog breaks down how the repo rate cut impacts your home loan and helps you make a decision aligned with your financial goals.
Understanding the Repo Rate and Basis Points
The repo rate (repurchase rate) is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Think of it as the cost of borrowing for banks. When the repo rate goes down, borrowing becomes cheaper for banks, and this benefit is often passed on to customers in the form of lower interest rates on loans.
On February 7, 2025, the RBI cut the repo rate by 25 basis points, bringing it down to 6.25%. Simply put, a basis point equals one-hundredth of a percentage point, so this reduction translates to a 0.25% decrease in loan interest rates.
Impact of a 25-Basis Point Cut on Home Loans
For home loan borrowers, this can be great news. A lower repo rate means banks can reduce the interest on home loans, directly impacting your EMIs. In most cases, it can lead to lower monthly payments to make it easier to manage your finances. If you’re planning to take a new home loan, this reduction can improve loan affordability, helping you borrow at a more attractive rate.
If you’re repaying a home loan, you can still benefit from the rate cut. Banks adjust interest rates for borrowers with floating-rate loans, reflecting market changes. This reduction will lower your interest rate and present you with two clear options:
- Reduce your EMIs Suppose you have a home loan of ₹30 lakh with an EMI of ₹23,000 for a tenure of 20 years. After the recent rate cut, your EMI could reduce to around ₹22,200. This ₹800 savings per month may seem small, but it adds up to around ₹9,600 annually, giving you extra cash to manage household expenses or invest in other financial goals.
- Shorten your loan tenure
Let’s say you decide to keep the EMI unchanged at ₹23,000 (as in the example above). The reduced interest rate can help you repay your loan faster, cutting your tenure to a period lesser than 20 years. This means you’ll pay off your loan earlier and pay less in total interest over the life of the loan.
Should You Lower EMIs or Shorten Loan Tenure?
A repo rate cut can help home loan borrowers rethink their repayment strategy. While both options (lowering EMIs or shortening the loan tenure) have their advantages, the right choice depends on your financial situation, future plans, and long-term goals.
Here’s what you should consider before making a decision:
- Current Financial Stability
If your monthly budget is stretched thin, lowering EMIs can offer some breathing space. On the other hand, if your finances are stable, shortening the tenure could be a smarter move.
- Future Income Prospects
If you are expecting a salary increase or other steady income growth, shortening the loan tenure can help you pay off the loan quickly while future earnings take care of other goals.
- Lifestyle and Financial Goals
Planning for a major expense, like your child’s education or a big-ticket purchase? Lower EMIs might give you more flexibility to allocate funds elsewhere. But if debt-free living is your priority, a shorter loan tenure can get you there faster.
It’s all about striking the right balance by thinking about where you stand financially today and where you want to be in the next few years. A carefully thought-out decision can make the most of this repo rate cut and keep your financial journey on the right track.
Conclusion
The recent repo rate cut can be a golden opportunity for home loan borrowers to optimise their repayment strategy. If you have a floating-rate home loan, you can benefit from the lower rate immediately by contacting your bank via email or in-person to initiate the adjustment.
For borrowers with a fixed-rate loan, refinancing might be an option worth exploring to switch to a lower rate. However, this decision requires careful consideration. So, take some time to review your current loan terms, assess your financial situation, and weigh the pros and cons.
FAQs
- How long does it take for the repo rate cut to reflect in my home loan EMIs ? For floating-rate loans, the impact of a repo rate cut usually reflects within 3 to 6 months, depending on your bank’s reset period. Lenders typically adjust the interest rate during the next reset cycle, and you can check with your bank for the exact timeline.
- Can I partially prepay my home loan instead of adjusting EMIs or tenure?
Partial prepayment can reduce your loan burden by lowering the outstanding principal. This can either reduce your EMIs or shorten the loan tenure, depending on what you choose. Just check for any prepayment charges with your lender.
Sources:
https://www.moneycontrol.com/news/business/personal-finance/rbi-cuts-repo-rate-by-25-bps-how-home-loan-borrowers-can-lower-their-interest-rate-burden-12933929.html
https://economictimes.indiatimes.com/defaultinterstitial.cms
