As widely expected, the Reserve Bank of India (RBI) on Wednesday cut the repo rate by 25 basis points, bringing it down to 6%. This move is set to bring some relief to borrowers, especially home loan customers. With this rate cut, we may soon see home loan interest rates drop below the 8% mark once again.

The RBI’s repo rate cut is a signal of a softer interest rate environment ahead. Home loan borrowers—both existing and new—should take stock of their loan structure and benchmark. Switch to repo-linked loans, if it makes sense. Refinance if your rate is much higher than what’s currently available. For homebuyers, the coming weeks could offer favourable conditions to lock in cheaper credit. But as always, borrow wisely and within your means.

Here’s what homebuyers and borrowers need to know and do now!

Home Loan Rates to Drop – But for Whom?

Currently, the best home loan rates are hovering around 8.10% to 8.35%. With the repo rate cut, lenders are likely to revise these further downward. However, the lowest rates are typically available only to prime borrowers—those with credit scores above 750—and to refinance cases. So, if you’re a new borrower with a good credit score, this is a good time to act.

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For existing home loan borrowers, the situation is more complex. Those with repo-linked home loans will benefit the most. These loans are directly tied to RBI’s repo rate, so any change usually results in a quick and full transmission of the rate cut. However, only borrowers with repo-linked loans from banks will enjoy this automatic benefit.

Adhil Shetty, CEO of Bankbazaar.com, says, “The rate cut is on expected lines. Home loan rates are about to go sub-eight again with today’s 25 bps rate cut. The lowest rates we’re currently seeing are between 8.10 and 8.35. However, the lowest rates are typically reserved for prime borrowers (credit score > 750) and refinance cases. Homeowners paying a substantially higher rate (50 bps or higher above prevalent rates) are advised to refinance their loans to avail lower rates. Do note that automatic, immediate and full rate cuts are available only on repo-linked home loans offered by banks.”

“Despite six years of repo-linking, we see that only 50% of floating rate loans with government banks are still linked to the MCLR and 2% to Base Rate. Borrowers with these banks are advised to take stock of their older loan benchmark and consider a refinance to a repo-linked home loan if it helps them save interest outflows,” Shetty adds.

Not All Loans Are Repo-Linked

Despite the RBI mandating repo-linked rates in 2019, a large number of borrowers still have loans linked to older benchmarks. Around 50% of floating rate home loans in government banks are still linked to the MCLR (Marginal Cost of Funds-Based Lending Rate). Another 2% are linked to the even older Base Rate.

Borrowers with these types of loans may not get the benefit of this rate cut, or at least not immediately. MCLR and Base Rate adjustments happen less frequently and are often smaller in size. So, if your home loan is still linked to one of these benchmarks, it may be time to take action.

Should You Refinance?

If your current home loan rate is significantly higher—say, 50 basis points or more above the current lowest market rates—it makes sense to explore refinancing options. Switching to a repo-linked home loan can help you save significantly on interest over the long term.

Before refinancing, check your existing loan details. Ask your bank which benchmark your loan is linked to. Then, calculate the cost of switching, including processing fees and legal charges. If the net savings over the remaining loan term are substantial, refinancing is a wise move.

For New Homebuyers

If you’re planning to buy a home, this is a good time to apply for a home loan. With interest rates expected to drop further, EMIs will become more affordable. But remember, lenders offer the best rates to those with high credit scores and strong repayment capacity. Check your credit report before applying. Also, compare loan offers across banks and housing finance companies to get the best deal.

A Word of Caution

While lower interest rates are welcome, homebuyers should not overextend themselves. Focus on affordability. Make sure your EMI outgo does not exceed 40% of your monthly income. Keep an emergency fund in place. And avoid borrowing just because rates are lower – evaluate your financial readiness first.