The Reserve Bank of India (RBI) has announced a 25 basis points (bps) cut in the repo rate, bringing it down to 6.25%. This move, which comes shortly after Budget 2025 introduced tax relief for salaried individuals, is expected to bring significant savings for home loan borrowers. Whether you’re an existing borrower or planning to buy a new home, this rate cut can reduce your Equated Monthly Installment (EMI) and improve loan affordability.

Impact of the RBI Repo Rate Cut

The repo rate is the interest rate at which the RBI lends money to commercial banks. A reduction in this rate often leads to lower interest rates on loans, benefiting borrowers by reducing EMI payments.

Between May 2022 and February 2023, the RBI had increased the repo rate by 250 bps, pushing it from 4% to 6.5%. This increase led to higher borrowing costs for homebuyers, making loans expensive. The latest rate cut reverses some of this pressure, bringing much-needed relief to existing and prospective borrowers.

How Much Will You Save on Your Home Loan?

To understand the impact of this rate cut, let’s take a practical example:

• Suppose you have taken a home loan of ₹80 lakh for 20 years at a 9% interest rate.

• Your current EMI stands at ₹71,978.

• With the repo rate cut, your new interest rate could be 8.75%, bringing your EMI down to ₹70,697.

• Over the loan tenure, your total interest payable reduces from ₹92.74 lakh to ₹89.67 lakh.

For smaller loans, the savings are also noticeable. For example:

• If you take a ₹30 lakh loan for 20 years at 8.75%, your new EMI will be ₹26,511, compared to ₹26,992 at 9%.

Who Will Benefit from the Rate Cut?

1. Existing Borrowers with Floating Rate Loans – Those who have home loans linked to external benchmarks like the repo rate will see an immediate reduction in their EMIs.

2. New Homebuyers – Lower interest rates make home loans cheaper, improving affordability.

3. Real Estate Sector – Lower borrowing costs can boost demand for housing, encouraging developers to launch new projects.

4. Salaried Individuals – The Budget 2025 tax relief, which eliminates income tax for salaries up to ₹12 lakh, combined with lower home loan rates, makes homeownership more achievable.

However, fixed-rate home loan borrowers will not benefit from this rate cut unless they choose to refinance their loans at the new rates.

How Quickly Will Banks Pass on the Benefits?

While the repo rate cut is immediate, banks and housing finance companies may take some time to adjust their lending rates. Financial institutions typically follow a reset cycle, meaning borrowers might see the impact over the next few months.

Atul Monga, CEO and co-founder of BASIC Home Loan, explains, “Both new and existing floating-rate borrowers will benefit from lower interest rates. However, the speed of transmission depends on the bank’s policy and reset frequency.”

Will Housing Demand Rise After the Rate Cut?

Lower interest rates make home loans more attractive, potentially increasing housing demand. Real estate experts believe this cut could lead to:

• Higher property sales, especially in the mid-range and affordable housing segments.

• Increased new project launches, as developers see renewed buyer interest.

• Growth in home loan disbursements, as financing becomes more accessible.

Shishir Baijal, Chairman and Managing Director of Knight Frank India, says, “We expect banks to pass on this rate cut to consumers, making home loans more attractive. Combined with tax incentives, this move will likely spur residential demand, especially in properties priced below ₹50 lakh.”

Economic Implications of the Rate Cut

The RBI’s decision aligns with the government’s broader economic strategy to boost consumption and investment. Samantak Das, Chief Economist at JLL India, notes:

“The 25 bps rate cut strategically complements fiscal measures from Budget 2025. By reducing borrowing costs, it provides much-needed momentum to the housing market, sustaining economic buoyancy.”

While the rate cut is a positive step, some concerns remain:

• Rising property prices – If inflation remains high, property costs might offset the benefits of lower interest rates.

• Bank lending policies – Not all banks may pass on the full benefit immediately, affecting the speed of impact on borrowers.