Repo Rate Cut Eases Home Loan Rates, But New Borrowers May Not Get Full Benefits

Rate Cuts Impact Home Loan Market Dynamics

The Reserve Bank of India (RBI)’s recent 25-basis-point (bps) repo rate cut, implemented on February 7, 2025, has triggered a decline in home loan interest rates across multiple banks. However, despite this relief for existing borrowers, new home loan applicants may not receive the full benefit of the rate reduction due to changes in the spread set by banks.

Public sector banks, including the Central Bank of India and Union Bank of India, have been quick to pass on the full 25 bps reduction to both new and existing borrowers, offering some of the lowest interest rates in the market. However, private banks have largely widened their spreads, reducing the rate cut impact for new applicants. This strategic move by private lenders ensures profitability but limits the benefits that new borrowers can access.

Understanding Repo Rate-Linked Home Loan Adjustments

Since October 1, 2019, all new retail floating-rate loans in India are linked to an external benchmark, which for most banks is the RBI’s repo rate. As per RBI guidelines, banks must review and adjust interest rates every three months to reflect changes in benchmark rates. This ensures that rate cuts are transmitted to existing borrowers within the stipulated period, preventing banks from delaying benefits.

Despite this mandate, new borrowers do not receive an automatic reduction in loan rates. Instead, banks have adjusted their spreads over the external benchmark, leading to only a partial reduction in interest rates for fresh applicants. Experts caution that while repo rate cuts signal a lower borrowing cost environment, potential home loan seekers should assess the spread being charged by their bank to ensure they receive the most competitive rate.

Current Home Loan Interest Rates Across Major Banks

Several banks have adjusted their home loan interest rates following the repo rate cut, with public sector lenders offering some of the most competitive rates. According to data from BankBazaar.com, as of March 21, 2025, home loan interest rates for a ₹50 lakh loan with a 20-year tenure are as follows:

Public Sector Banks Leading the Rate Cut Transmission

• Central Bank of India & Union Bank of India – Interest rates start at 8.10%, the lowest among all banks. EMI for a ₹50 lakh loan is ₹42,134 per month.

• Bank of Baroda, Bank of India, Indian Bank, Indian Overseas Bank, Punjab National Bank – Offer 8.15% as the starting interest rate, with an EMI of ₹42,290.

• Canara Bank – Charges 8.20%, resulting in an EMI of ₹42,446.

• State Bank of India (SBI) – Offers home loans from 8.25%, leading to an EMI of ₹42,603.

Private Banks Yet to Fully Pass On Rate Cut Benefits

Private sector banks have not fully passed on the repo rate reduction to new borrowers. Some institutions have only reduced rates by 10-15 bps instead of the full 25 bps, while maintaining a wider spread for fresh loan applicants.

• Kotak Mahindra Bank – Starting rate is 8.65%, with a 10 bps reduction post-repo cut. EMI is ₹43,867.

• HDFC Bank – Charges interest from 8.70%, offering just a 5 bps cut for new borrowers. EMI is ₹44,026.

• Axis Bank & ICICI Bank – Offer rates in the 8.75-9.00% range, leading to an EMI of ₹44,186.

According to Anuj Kesarwani, Founder, Zenith Finserve, private banks have likely increased the spread on new loans to protect their margins, ensuring that the full benefit of the repo rate cut is not extended to fresh applicants.

Why Are New Borrowers Missing Out?

While the RBI mandates banks to pass on repo rate reductions to existing borrowers, new borrowers are subject to different terms. Banks retain the freedom to adjust their spread, which is the additional percentage charged over the external benchmark.

Key reasons why new borrowers may not fully benefit:

• Banks have increased their spread to compensate for reduced interest revenue.

• Lending institutions use discretionary pricing, adjusting offers based on risk assessment.

• Higher demand for home loans allows banks to keep rates higher despite a declining repo rate.

According to Vipul Patel, Founder of MortgageWorld, “To avoid reducing rates in line with the repo rate cut, banks have widened the spread over the external benchmark for new home loan contracts. However, as per RBI rules, banks have to pass on the entire benefit to existing borrowers.”

What Should Home Loan Borrowers Do?

Financial experts suggest that borrowers, both new and existing, should be proactive in negotiating their home loan interest rates. Adhil Shetty, CEO of BankBazaar.com, recommends focusing on the spread rather than the absolute rate, as banks can adjust the spread within regulatory limits to maintain profitability.

Tips for home loan borrowers:

• Review your loan agreement and ensure that the repo rate benefit has been passed on.

• Compare spread percentages offered by different banks to identify the most competitive lender.

• For existing borrowers, refinancing options may provide better rates if the current spread is high.

• Maintain a strong credit score, as prime borrowers receive the lowest spreads from lenders.

According to RBI’s 2019 circular, banks cannot increase the credit risk premium unless the borrower’s financial situation substantially changes. However, operating costs and spreads can be adjusted once every three years, allowing banks some flexibility in pricing.

Currently, with the repo rate at 6.25%, the lowest home loan rates range between 8.10-8.25%, translating to a spread of 1.85-2.00 percentage points for prime borrowers. New applicants should carefully assess their loan terms to ensure they receive the maximum benefit from the repo rate cut.