RBI Slashes Repo Rate By 25 Bps; Here’s How Much You Will Save On Your Home Loan

The rate cut could be the beginning of a low-interest cycle and is expected to ease the burden on loan borrowers, as banks prepare to lower interest rates on home loans, auto loans, & business credit

In a significant step to boost economic growth, the Reserve Bank of India (RBI) has slashed the repo rate by 25 basis points (bps), reducing it from 6.5 per cent to 6.25 per cent, in its first monetary policy review of the calendar year. This also marks the first Monetary Policy Committee (MPC) meeting under the leadership of newly appointed RBI Governor Sanjay Malhotra. 

The rate cut could be the beginning of a low-interest cycle and is expected to ease the burden on loan borrowers, as banks prepare to lower interest rates on home loans, auto loans, and business credit. With cheaper borrowing, spending and investment are likely to rise, giving the economy a much-needed push.

The central bank has adjusted the repo rate after two years of holding steady. This is also the first time the rates have been cut since May 2020. Coupled with the recent tax cuts earlier this month, the salaried and middle-class segments have received a double boost to counter inflation and increase household savings.

A 25-basis point reduction in interest rates means home loan borrowers can either opt for lower EMIs or shorten their loan tenure to repay their debt faster. Those currently paying higher home loan interest rates may also consider refinancing to a lower rate, especially if they are in the early stages of their loan. However, they should do the math to determine how much they would actually save.

Consider a loan of Rs 40L taken a year ago at 8.75 per cent for 20 years. The reduction in the repo rate gets transmitted to the loan entirely, so when the repo is reduced by 25 bsp, the interest is also reduced by 25 bsp. Banks typically maintain your EMI when the rate is revised. This means that you save on the total interest you repay as well as reduce your tenor.

 

For Principal of 40L; EMI of Rs 35,348; Tenor 20 years
	Interest @8.75%	Interest @8.5%	Savings
Interest outflow	Rs 44,83,622.81	Rs 41,46,960.19	Rs 3,36,662.62
Tenor	240 months	230 months	10 months

BankBazaar recommends that borrowers with good credit scores explore more aggressive repayment options, such as refinancing to a rate lower by 50 bps or more. If they keep their EMI constant with a lower interest rate—say, 8.25 per cent—they could achieve per-lakh savings of Rs 14,480 over the remaining tenure. 

For the same Rs 40L loan mentioned above, this comes to: 

Refinancing outstanding loan after 1 year at same EMI
	Interest @8.75%	Interest @8.25%	Savings
Interest outflow	Rs 44,83,622.81	Rs 38,50,794.95	Rs 6,32,827.86
Tenor	240 months	222 months	18 months

These savings, nearly 15 per cent per lakh, are significant. When viewed alongside additional tax savings from revised income tax slabs, a salaried individual could see substantial financial gains in FY 2024-25. The surplus funds can be invested in instruments that offer higher returns.

(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)