RBI Monetary Policy: What new and existing home loan borrowers need to know

The RBI’s decision to keep the repo rate at 5.50% means existing home loan EMIs stay unchanged. For new borrowers, this is a good time to lock in a rate

The RBI's decision to keep the repo rate unchanged at 5.50% ensures that existing home loan EMIs remain stable for now. For new borrowers, this could be an ideal time to lock in a home loan. Although the policy rates remain steady, banks may soon adjust their spreads or introduce competitive schemes, especially during the festive season. Waiting for these offers could help secure a better rate, while acting too quickly might mean missing out on potentially better deals as lenders adjust their offerings.

The RBI's decision to keep the repo rate unchanged at 5.50% ensures that existing home loan EMIs remain stable for now. (Photo for representational purposes only) Anshuman Poyrekar/HT PHOTO) (HT_PRINT)

For existing home loan borrowers, it might be a good opportunity to consider switching lenders if you’re not receiving the benefits of lower rates. Ensure you check with your bank to confirm whether the recent rate cuts have been passed on to you.

For new home loan borrowers

Rohan Juneja is a 32-year-old professional looking to buy his first apartment in Pune. With the repo rate steady at 5.5%, banks are unlikely to reduce their lending rates right away. However, one should understand that lenders typically take time to pass on benefits to new borrowers even after the rates are reduced. Here is what someone in Juneja’s situation should do.

It makes sense if you stay put: Rohan should not rush into a new loan immediately. While the policy rates remain unchanged, banks might adjust spreads or launch competitive schemes in the coming weeks, especially since the festive season is on. Waiting for these offers can help them secure a better rate while jumping in too quickly could mean missing out on slightly better deals when lenders recalibrate.

Explore short term schemes: Some banks and home loan companies may offer schemes where borrowers can reduce their interest rates by paying a small lump sum upfront. For Juneja, he can pay an extra rupees two to three lakh at the start and bring down his repayment period by months. This would mean lower interest rate paid over the period of the loan without taking on additional EMI.

Do comparison shopping: “Prospective home loan borrowers should also compare interest rates from different lenders and consider locking in a fixed-rate loan to avoid higher interest rate in future when repo rate goes up,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm.

A new borrower should, therefore, not rush to take the first offer available, but should negotiate processing fees, prepayment terms and compare interest rates across various banks. Even a marginally lower interest rate can lead to substantial savings over the long term. Also, while fixed rate home loans can come at a slightly higher rate, they act as a safeguard against unexpected rate hikes. It can be useful for borrowers who have tight budgets.

Focus on ability to repay: This is a good time to freeze home loans for new borrowers, with stable policy rates giving clarity on borrowing costs. But they should keep in perspective that these rates can swing either way in the medium term based on the economy. This means that interest rates and hence the EMI can go up in the future.

“Proper financial planning, with a sense of ability to repay, is preferable to guessing the interest rate cycle,” says Pramod Kathuria, founder and CEO, Easiloan.

Here’s what existing home loan borrowers should do

Now, let us consider Meena Sharma, a 40-year-old IT professional in Bengaluru who took a ₹80 lakh home loan three years ago. Her loan is linked to the external benchmark-based lending rate (EBLR), which moves in tandem with the repo rate. Since the RBI has held rates steady, her EMI remains unchanged. But that doesn’t mean she should simply continue with her loan.

Consider balance transfer: Many banks today offer lower rates to new borrowers while keeping existing customers at higher rates. It makes a lot of sense for someone in such a situation to move out of the existing loan and shift to a lender that treats them on par with new borrowers. Existing borrowers need to check with their banks if the benefit of lower rates has been passed on.

“If not, they should look around and see if another lender is offering a lower rate. Switching or refinancing a home loan can make a big difference if you have a large loan, say rupees one crore, shifting can save you several lakhs of rupees over time,” says B. Srinivasan, director and founder, Shree Sidvin Investment Advisors, an investment planning firm.

“For example, if you're at 9% and another lender offers 8%, that's a huge difference over 15-20 years. I always advise switching to a good bank that offers the best rates and service." says Rajendra Deshpande, Managing Director, Propseva, a real estate services company.

Consider prepayment: Meena could use annual bonuses, maturity proceeds of fixed deposits, or part of her savings to prepay a portion of her loan. Since home loans are front loaded with interest, prepaying in the early years of loan brings maximum benefit. Even if she prepays Rupees two to three lakhs every couple of years she might reduce overall interest paid significantly.

“The borrowers with money to spend can also think of making part-prepayments to save long-term interest outgo, particularly when the rates are stable,” says Kathuria.

Optimise EMIs: If it is possible, increasing your EMI slightly is a good idea, because not only will it reduce the tenure of the loan, but also save on total interests paid. If Meena decides to increase her EMI by 10% from ₹70,000 to ₹77,000 per month, then she will shave off nearly two years from her loan and save a few lakhs in interest.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics