For home loan borrowers, 2025 has brought good news after a long time. The Reserve Bank of India’s monetary policy committee slashed its policy repo rate by 50 basis points (25 bps each in February and April) from 6.5 per cent to 6 per cent.
The repo rate is the rate at which the RBI lends money to commercial banks. With the repo rate coming down, mortgage rates, too, have started declining, more so if the loan is linked to an external benchmark like the repo rate.
Since February 2023, the repo rate had been unchanged at 6.5 per cent. The cut in February was the first in almost five years.
Since 2019, a large portion of the new home loans are linked to EBLR (external benchmark lending rate). These loans are among the quickest to see the transmission in rates.
A 50 bps cut by the RBI can lead to sizeable savings for borrowers over time. For instance, if you have availed a floating rate home loan of Rs50 lakh repayable over a period of 20 years at an interest rate of 9 per cent, your monthly EMI (equated monthly instalment) would be Rs44,986. A 50 bps reduction in interest rates will bring this monthly EMI down to Rs43,391, which translates to a saving of Rs1,595 a month, or Rs19,140 a year, or a sizeable Rs3.82 lakh over 20 years.
A major reason behind the RBI cutting interest rates is the cooling inflation. The CPI (consumer price index) inflation for April moderated to a near-six-year low of 3.16 per cent, aided by declining food prices. It was 3.34 per cent in March. At the same time, growth pressures have emerged, especially amid global trade and tariff-related tensions. That gives the RBI room to cut rates.
“We anticipate the CPI inflation to average 3.5 per cent in FY2026, with the prints for second quarter and third quarter sharply trailing the RBI’s projections for these quarters, allowing for an additional 75 bps of rate cuts in this calendar year,” said Aditi Nayar, chief economist at credit ratings agency ICRA. Nayar sees a 25 bps rate cut each in June, August and October policy meetings.
Paras Jasrai, associate director at India Ratings and Research, also expects the RBI to cut rates by at least 75 bps in the current financial year.
A few other experts see at least 50 bps cut. That means, by the end of the year, the repo rate could be around 5.25-5.50 per cent. Once banks start seeing their borrowing costs decline, they will pass that on by lowering their lending rates.
If there is another 50-75 bps cut in home loan rates, you are looking at additional monthly saving of Rs1,600-2,100. “For new borrowers, the benefits are immediate―they can access credit at lower interest rates. For existing borrowers, however, the benefit depends on how quickly their bank or lending institution transmits the rate cuts,” says Santosh Joseph, CEO, Germinate Investor Services. “Sometimes the transmission is automatic, but in other cases, especially for older loans, you might need to contact your bank to request a reset or switch to a lower rate.”
Not all home loans, however, are EBLR-linked.
Many of the borrowers before 2019 might have their loans linked to MCLR (marginal cost of funds-based lending rate) or base rate. MCLR is the minimum rate a bank needs to charge for a loan and it cannot lend below that level. Before MCLR, most loans would be based on base rate, which was the minimum interest rate for a loan that was set by the Reserve Bank. The Reserve Bank had pushed banks for EBLR loans as the rate transmission in the MCLR regime was found to be slower.
If you are lowering your interest rate, the time may perhaps be right to switch your existing loan to an EBLR-linked loan. You could even look at transferring your home loan to another bank that may be offering lower rates.
While lowering your EMIs will help you improve monthly liquidity, if you do not have cash flow issues, you may want to look at the other option of keeping the EMI unchanged when rates fall. By doing this, your overall loan tenure will start coming down.
What we often overlook is the huge interest outgo on loans, especially in the earlier years. In our example of a Rs50 lakh loan for 20 years at 9 per cent interest, your total interest outgo over the period could itself be around 057 lakh. “Think of it this way: by not reducing your monthly outflow, you are making accelerated progress toward becoming debt-free. You reduce the total number of EMIs paid, which is in itself a form of financial gain,” said Joseph.
This strategy is especially effective in a soft interest rate environment, where even a small drop in rates can lead to significant long-term savings if used to shorten the loan term, he added.
Ultimately, both options may have merits, depending on your monthly cashflows, ability to repay and your goals and priorities. The amount you could save by reducing EMIs could be channeled into other lucrative investments. On the other hand, when you reduce tenure, you cut down the number of months you will pay interest, and that will significantly reduce the total interest paid over the life of the loan.