Home loan is a dream for many Indians. This is the best time for those who want to buy a house, because the interest rates are decreasing in India. It benefits both existing borrowers (with floating rates) and potential borrowers. In this article we will explore the reasons behind the fall in home loan rates, their implications for borrowers and what should new and existing borrowers do?
Why are Rates falling?
- The main reason for the fall in the home rate is reduce in repo rate by RBI. Repo rate is a rate at which commercial banks borrow from Central Bank. RBI reduced REPO rate 3 times in 2025, On 7th February 2025, RBI reduced REPO rate from 6.5% to 6.25%. On 9th April 2025, rates are again reduced from 6.25% to 6%, repo rate was again reduced on June 6th, 2025, from 6% to 5.5%. RBI also reduced CRR by 100 basis points
- Another reason for reduction in the home loan rates is competition among Housing Finance Companies to capture market share. As banks need to be more competitive in this period, banks are further reducing the interest rates.
What does this Mean to Buyers?
New Borrowers:
- Lower EMI’s: The main advantage for new borrowers (both floating and fixed) is that the interest rates are very low from day one. Due to this, home ownership has become affordable.
- Higher Loan Eligibility: Due to a reduction in the interest rates, the borrowers can borrow even more with the same income level, same credit score. The ability of a borrower to borrow also increases.
- Bargaining Power of Borrowers: As there is high competition in the market, and the interest rates are reduced, the new borrowers have the power to bargain regarding fees, tenure and disbursal amount,
- Affordable Long-term commitment: As the interest rates and EMI are less, the long-term commitment of loan would not be an issue, borrowers can clear it without any hindrances.
Existing Borrowers:
- Reduction in EMI: The borrowers who got borrowed loan at floating rates would have the benefit of reduction in the EMI. This would help the borrowers to increase their savings.
- Restructuring the loan: Existing Borrowers (floating interest) rates have the option to reduce their EMI’s or reduce the tenure of the loan. Both will help the borrowers to save money.
- Refinancing of Loan: It helps the borrowers to transfer their loans to the banks or NBFC’s, which provide lower interest rates. There will be processing charges, but that would be negligible before the money that is going to be saved.
Potential Risks:
- Increase in interest rates: Interest rates will not remain low always; they would increase if there would be rise in inflation or any changes in the economy as the repo rate also increases. Due to this, the EMI’s would also rise.
- Challenges in preparing budgets: Budgets cannot be fixed, and due to a change in the interest rates, the budget should be flexible. Due to this, preparation of budgets are more complicated.
- Loan traps: Few lenders would reduce the interest rates temporarily, but the rates would eventually be increased. As a result, borrowers end up paying high EMI
- Extension of loan tenure: Few lenders would reduce EMI but would increase the tenure of the loan. Due to which, it results in paying a large amount over the tenure.
- Borrowing more than required: Many borrowers have higher eligibility as the interest rates are low, so they would borrow more loan. They had to face issues if the interest rates increase, because with the increase in interest rates, the EMI to be paid also increases.
- Rise in the prices of Houses: The demand for houses increases as the loan eligibility of a person increases, which leads to higher demand for properties. So, as the demand rises, the prices of properties also will rise.
- Potential risk for floating rate: Floating rates help borrowers when then rates are reduced but they should face trouble in case of an increase in the interest rates. In this case, Fixed interest borrowers do not get any gain and will not suffer much loss.
Conclusion
To summarize, low home loan rates provide an opportunity for new and existing borrowers to make great financial decisions. As a result of lower EMIs, borrowers will now be able to afford their ongoing costs/overheads with greater ease. Now is the time to purchase or re-finance a home loan. Borrowers should always be mindful of the possible consequences regarding possible interest rate increases, teaser offers, and other hidden costs.
Therefore, we should ensure that the borrowers are comparing lenders, buying the correct type of loan, and planning their repayment processes properly, and can maximize the benefit of paying lower interest rates at this time. At the end of the day, financial prudence and considerations can be leveraged into longer term savings and establish stability in buying a home or a new investment with lower interest rates.
Written by N G Sai Rohith
