What Does RBI's Rate Cut Mean For Existing And New Home Buyers?

If you’re on a fixed rate, you might want to evaluate if switching to a floating rate makes sense, depending on market conditions and your remaining loan tenure.

Home loan rates, previously around 8.30-8.50 per cent, are expected to drop post the RBI cut.

Source : ICICI Bank blog

With the RBI announcing its first repo rate cut in nearly five years, homeowners can expect lower home loan interest rates. While some borrowers will benefit automatically, others may need to negotiate with lenders for partial relief. Here’s a strategy for both existing and new borrowers to maximize the benefits of this rate cut.

For Existing Borrowers

Existing borrowers fall into three categories:

Fixed or Floating Rates: Over 90 per cent of Indian homeowners have floating rate loans, which adjust with repo rate changes. Fixed-rate borrowers, however, won’t see any impact from rate cuts. If you’re on a fixed rate, you might want to evaluate if switching to a floating rate makes sense, depending on market conditions and your remaining loan tenure.

Bank or NBFC Loans: If you have a floating rate loan from a bank, the RBI’s rate cut will likely be passed on fully or partially within a set period. NBFCs, on the other hand, have more discretion and may charge a processing fee for rate reductions. It’s important to check your loan agreement and follow up with your lender to ensure you receive the full benefit of the rate cut.

Pre- or Post-2019 Loans: Borrowers who took floating rate loans after October 2019 have repo-linked loans, ensuring automatic transmission of RBI rate cuts within a quarter. Pre-2019 borrowers likely have MCLR-linked loans, where rates reset every 6-12 months. If you fall into the latter category, review your loan contract to understand when your rate will reset and how much you stand to save.

Strategy: If your current rate is 50 bps or more above new loan rates and you have over half the loan tenure left, consider refinancing. You can either switch to a repo-linked loan with your current bank or transfer your loan to another lender offering better terms. While transfer costs around 1 per cent of the loan amount, the savings from lower interest rates can recover this within a few quarters. Additionally, refinancing can help reduce your EMI burden or shorten your loan tenure, depending on your financial goals.

For New Borrowers

Home loan rates, previously around 8.30-8.50 per cent, are expected to drop post the RBI cut. Borrowers with stable incomes and credit scores of 750+ are likely to secure the lowest rates. Women, government employees, and premium property buyers may also receive preferential rates. It’s a good time to shop around and compare offers from multiple lenders to ensure you get the best deal.

Combined with income tax slab cuts, lower interest rates could save high-income borrowers Rs 50,000-200,000 annually, increasing their loan eligibility by Rs 5-20 lakh for a 20-year loan. This allows new borrowers to expand their budgets and upgrade to their dream homes. Additionally, the reduced interest burden can free up funds for other investments or financial goals, making homeownership more affordable and accessible.

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