Understanding the Impact of RBI's Repo Rate Cut on Home Loans

Overview of RBI's Repo Rate Adjustment

The Reserve Bank of India (RBI) has provided some relief to borrowers this year by reducing the repo rate by 50 basis points (bps) across two monetary policy meetings. This adjustment lowers interest rates for both new and existing home loan customers. However, this reduction presents a crucial choice for borrowers: Should you opt for a lower EMI or shorten your loan tenure?

🔻 Implications of the Repo Rate Cut

The RBI's decision to cut the repo rate by 25 bps in February and another 25 bps in April 2025 results in a total reduction of 50 bps. Consequently, banks are expected to adjust interest rates for floating-rate home loan borrowers during their reset periods.

Borrowers now face two options:

Choices for Borrowers

• Lower their EMI (monthly payment)
• Maintain EMI but shorten the loan tenure

🔍 EMI vs Tenure Reduction – Key Differences

1. Reducing EMI:
   • Provides immediate monthly relief
   • However, total interest paid over time increases
2. Reducing Loan Tenure:
   • EMI remains unchanged
   • But your loan concludes sooner
   • Significant savings on total interest

📊 Example: Comparing Savings

Consider the following scenario:

• Loan amount: ₹40 lakh
• Interest rate: 8.5% (now reduced to 8% after the cut)
• Tenure: 20 years

Option 1: Reduce EMI

• Old EMI: ₹34,713
• New EMI: ₹33,458
• Monthly savings: ₹1,255
• Total interest saved: ₹3.01 lakh

Option 2: Reduce Tenure (Keep EMI Same)

• Tenure decreases to 18.33 years (20 months earlier)
• Interest savings: ₹6.93 lakh

➡️ Net Benefit of Reducing Tenure: ₹3.92 lakh more than EMI reduction.

💡 Which Option is Best for You?

• Select EMI reduction if your monthly budget is tight or your income is unstable.
• Opt for tenure reduction if you can manage the same EMI—it’s a more advantageous long-term strategy.

🧠 Expert Recommendation:

Always consult your lender to ensure that the interest rate change is applied in a manner that reduces your tenure, rather than just your EMI—unless cash flow is a pressing issue.