On June 6, 2025, the Reserve Bank of India (RBI) implemented a notable repo rate cut of 50 basis points (bps), lowering the rate from 6% to 5.5%. This follows two prior cuts of 25 bps each in February and April 2025, resulting in a total reduction of 100 bps for the year. For borrowers of home loans, this adjustment may offer relief with the prospect of lower Equated Monthly Installments (EMIs). The key questions are: how much will your EMI be reduced, and when will you see these savings? Let’s analyze the details.
Understanding the Repo Rate and Its Effects
The repo rate represents the interest rate at which the RBI lends to commercial banks. When this rate decreases, banks can secure funds at a reduced cost, potentially leading to lower interest rates on various loans, including home loans. Since many home loans approved after October 2019 are linked to the repo rate (Repo-Linked Lending Rate, or RLLR), these borrowers are more likely to experience quicker benefits from the rate cuts compared to those with loans tied to the Marginal Cost of Funds Based Lending Rate (MCLR).
Potential EMI Reductions
The degree of EMI reduction is influenced by the loan amount, term, and how much of the rate cut banks choose to pass on. Here’s a specific example illustrating the impact of the recent 50 bps cut:
For a ₹50 Lakh Home Loan (20-Year Tenure):
Before the Rate Cut (8.5% Interest Rate): The monthly EMI would be around ₹43,391.
After the Rate Cut (8.0% Interest Rate): If banks fully transfer the 50 bps reduction, the EMI might fall to about ₹41,822.
Monthly Savings:Approximately ₹1,569, which totals to nearly ₹19,000 annually.
Overall Interest Savings Over the Loan Term: Estimated at ₹3.76 lakh, assuming no further rate modifications.
For a ₹30 Lakh Home Loan (20-Year Tenure):
-Before the Rate Cut (8.5% Interest Rate): The EMI would be around ₹26,035.
After the Rate Cut (8.25% Interest Rate): The EMI might decrease to roughly ₹25,526 if banks pass on a 25 bps cut.
Monthly Savings: About ₹509, amounting to an annual savings of ₹6,108.
Total Interest Savings: Approximately ₹1.22 lakh over the mortgage duration.
These figures assume that banks will fully or partially pass on the benefits of the rate cuts. Experts have indicated that banks might initially transfer around 10-15 bps, with the full effect being realized gradually.
Choosing to Shorten Loan Tenure
Rather than reducing your EMI, you might consider maintaining the same EMI amount while decreasing the loan tenure, which could result in greater interest savings. For example, with a ₹50 lakh loan at 8.25% interest and a 20-year term, keeping EMI steady after a 25 bps cut could shorten the repayment period by about 10 months, saving nearly ₹4.36 lakh in interest across the loan term. Adhil Shetty, CEO of BankBazaar, emphasizes that reducing the loan tenure can lead to interest savings that are significantly greater than just cutting the EMI.
When Will You Realize the Savings?
Repo-Linked Loans: For these loans, the EMI or tenure reduction typically takes place at the next reset date, which could be monthly, quarterly, or as outlined in the loan agreement (generally within 1-3 months).
MCLR-Linked Loans: The adjustment may be slower, as these depend on the bank’s funding costs, which can take several months to change.
New Borrowers: New loans may benefit from lower interest rates (potentially below 8%), as some banks have begun offering rates as low as 7.85% for prime borrowers with excellent credit scores.
However, not all banks will pass on the full benefits immediately. Delays or limitations in transmission can occur due to factors such as funding costs and non-performing assets. After the February 2025 cut, some banks were slow to implement rate changes, prompting experts to advise borrowers to keep a close eye on lender policies.
Making the Most of the Rate Cut
To maximize the benefits of the repo rate cut, consider these strategies:
1. Identify Your Loan Type: Determine whether your loan is linked to the repo or MCLR rate. Repo-linked loans will reflect changes more quickly, so if you have an MCLR-linked loan, think about switching to a repo-linked one.
2. Consider Refinancing: If your current interest rate is substantially high (for example, above 8.5%), refinancing with lenders who offer rates around 7.85%-8% could result in additional savings. For a ₹50 lakh loan with 15 years remaining, shifting from 9% to 8% could decrease the EMI by ₹1,147 monthly and save ₹1.92 lakh over the full term.
3. Maintain a Strong Credit Score: A score above 750 can help you secure the best rates, especially for refinancing or new loans.
4. Think About Part-Prepayments: Applying windfalls or extra income towards part-prepayments can significantly diminish interest payments. Even a ₹50,000 prepayment can yield substantial long-term savings.
5. Compare Bank Offers:Typically, public sector banks are quicker to incorporate rate cuts compared to private banks. Evaluate rates from banks like SBI, Bank of Maharashtra, or Punjab National Bank, which updated rates post-April 2025.
Wider Implications for Borrowers
The repo rate cut benefits not only home loan borrowers but also impacts other types of retail loans:
Auto Loans: For a ₹10 lakh car loan (7-year term) at 9.5%, a 25 bps cut could lower the EMI by around ₹152 monthly, resulting in annual savings of ₹1,824.
Personal Loans: Most personal loans have fixed rates and will not see immediate EMI reductions, but new personal loans may be available at reduced rates.
Additionally, the combination of this rate cut with Budget 2025 tax exemptions, such as zero tax for incomes up to ₹12 lakh and a ₹75,000 standard deduction, enhances disposable income. For individuals earning ₹25 lakh per year, the tax savings of ₹1.14 lakh along with ₹1.50 lakh savings on home loan interest could yield total annual savings of ₹2.64 lakh, or about ₹22,000 monthly.
Final Considerations
While the rate cut appears advantageous, actual savings will depend on how promptly and fully banks pass on the benefits. Borrowers should:
– Stay updated on their bank’s rate change announcements.
– Use EMI calculators to evaluate potential savings tailored to their loan circumstances.
– Be cautious regarding refinancing costs, like processing charges, which might offset savings if the rate difference is marginal.
Positive Outlook for the Real Estate Sector
Experts, including Gaurav Gupta, Secretary of CREDAI, believe the rate cut will improve housing affordability and drive demand, especially in the affordable and mid-range market segments. Reduced borrowing costs can also lessen construction expenses for developers, potentially keeping property prices stable. Nonetheless, rising property prices in certain areas may diminish these advantages.
Conclusion
The RBI’s 50 bps repo rate cut to 5.5% in June 2025, aligned with previous reductions, is beneficial for home loan borrowers, potentially reducing monthly payments by ₹1,500-₹2,600 for a ₹50 lakh loan. By choosing to shorten the loan term or refinance, borrowers can maximize their savings, with total interest reductions amounting to lakhs over the lifetime of the loan. However, the actual relief experienced will depend on the speed and policies of banks regarding rate adjustments. Borrowers should remain proactive—reviewing loan terms, comparing lender options, and exploring strategic repayment options—to fully leverage this favorable rate climate.
For the most current updates on bank rate adjustments, visit your lender’s website or utilize resources like BankBazaar’s EMI calculator. For refinancing options, consider checking platforms like Moneycontrol or directly contacting banks