The reduction of the repo rate by the RBI by 25 basis points is expected to lower home loan EMIs. What implications will this have for borrowers?
The reduction of the repo rate by the RBI by 25 basis points is expected to lower home loan EMIs. What implications will this have for borrowers?
Homebuyers have been under significant strain from elevated EMIs and interest rates on home loans for more than two years, making this change long awaited.
In a significant development for home loan borrowers, the Reserve Bank of India (RBI) announced a reduction of the repo rate by 25 basis points during its monetary policy meeting on February 7, 2025. This decision represents the first rate cut in almost five years, a timeframe characterized by either stable or rising home loan rates. As a result of the RBI’s repo rate adjustment, it is anticipated that home loan lenders will decrease interest rates on floating-rate home loans.
A 0.25% decrease in interest rates presents home loan borrowers with two choices: they can either lower their monthly EMIs or reduce the duration of the loan, enabling them to pay off their loans more quickly. For example, on a Rs 30 lakh loan with a 20-year term, if the interest rate falls from 9% to 8.45%, the EMI will drop from Rs 26,992 to Rs 26,551, leading to a decrease of Rs 480, which is a reduction of 1.78%.
Homebuyers have been under significant strain from elevated EMIs and interest rates on home loans for more than two years, making this change long awaited.
A low-interest rate climate during the COVID-19 pandemic contributed to a significant increase in homeownership, enabling banks and financial institutions to provide affordable credit options.
Throughout much of 2021 and into part of 2022, home loan interest rates frequently remained below 7%. However, in June 2022, the Reserve Bank of India (RBI) initiated a series of repo rate hikes, which is the rate at which it lends to commercial banks. This action resulted in higher home loan interest rates as financial institutions faced tighter margins.
Industry estimates indicate that equated monthly installments (EMIs) for borrowers with floating-rate mortgages have surged by more than 20%.
Currently, most banks and lenders are offering home loans with interest rates hovering around 9% per annum, according to experts.
Borrowers, especially those with variable interest rate loans, will gain from the decreased lending rates resulting from the lowered repo rate. This reduction will enhance loan affordability, leading to a decline in EMIs for home and personal loans, thereby alleviating the financial strain on households.
An official emphasized that this rate reduction serves as a vital impetus that will benefit both homebuyers and developers, fostering positive momentum in the real estate sector. He further said this initiative is anticipated to enhance housing demand, elevate market activity, and promote increased investment in real estate. It is likely to instill confidence in both buyers and developers, contributing to a more robust and dynamic sector. Developers will gain from improved access to financing, allowing them to expedite project completion and address the rising demand. Additionally, this decision is in line with the government’s commitment to economic growth, ensuring the long-term stability of the housing market.
Prior to the announcement, analysts expressed uncertainty regarding the Reserve Bank of India’s decision to either reduce the interest rate or maintain it to address inflation and ensure currency stability. Nevertheless, with inflation seemingly under control and economic growth stable, the central bank opted to decrease the rates.
