Are you prepared for potential changes to your home loan EMIs? Following a challenging 2024 marked by elevated interest rates, 2025 may bring some relief for home loan borrowers. With expectations pointing towards a possible rate cut cycle from the RBI, it is important to understand how interest rate fluctuations can affect your home loan EMIs and what actions you can take to capitalize on potential changes.
Why interest rates matter?
In India, most home loans are linked to floating interest rates, which are directly influenced by the Reserve Bank of India’s (RBI) monetary policy decisions. When the RBI changes interest rates, it impacts the cost of borrowing for banks, which in turn, affects the interest rates on home loans. As a result, your EMIs (Equated Monthly Installments) are directly impacted by these rate changes.
For home loan borrowers, these rate changes can have significant implications, as higher interest rates generally result in higher EMIs, making home loans more expensive. Conversely, when interest rates are lowered, EMIs decrease, making home loans more affordable. Therefore, staying informed about the RBI’s policy decisions is critical for anyone with a home loan or those planning to take one, as it helps in planning long-term finances and adjusting repayments accordingly.
The latest update from the RBI
The reserve bank of India (RBI) on December 6, 2024, held interest rates steady at 6.5% in its monetary policy review. This marks the 11th consecutive decision to maintain the status quo, offering no immediate relief for home loan borrowers. For potential homebuyers, this means home loan interest rates are likely to remain stable for now.
This decision follows India's real GDP growth slowing to a seven-quarter low of 5.4% in the July-September 2024 quarter, raising concerns. The RBI’s main focus continues to be on retail inflation, aiming for a target of 4%. With India’s GDP forecasted to grow between 6.5% and 7% in FY 2024-25, and the real estate sector contributing 7% to the economy, maintaining stability is crucial for sustaining economic momentum.
How a rate cut affects your EMIs
If the RBI reduces interest rates, your home loan EMIs may decrease, though the extent of the impact depends on the structure of your loan:
Lower EMIs: If you choose to reduce your EMI in response to a rate cut, it will ease your monthly financial burden. However, this may result in paying more interest over the life of the loan, as the loan tenure typically remains unchanged.
Faster loan repayment: Alternatively, maintaining your EMI at the same level but benefiting from the reduced interest rate could help you pay off your loan faster. With the same EMI, more of your payment goes toward reducing the principal balance, thereby shortening the overall loan tenure.
Ultimately, the impact of a rate cut on your finances depends on how you choose to manage your loan after the rate change. Whether you opt to reduce your EMI for immediate relief or maintain your EMI to accelerate loan repayment, both options come with their own set of financial benefits and implications. Therefore, it’s important to assess your financial situation, goals, and capacity to make an informed decision that aligns with your long-term financial health.
What can home loan borrowers do in this scenario?
Given that interest rates are expected to decrease in 2025, here are some steps home loan borrowers can take to make the most of this situation:
Refinance your loan: If your current interest rate is higher than what other lenders are offering, consider refinancing your loan. This could help reduce your EMI or improve your loan terms.
Switch to external benchmark lending rate (EBLR): If your loan is still under the old MCLR (Marginal Cost of Funds based Lending Rate) or Base Rate regime, check with your bank about switching to EBLR, which is more closely linked to interest rates and allows for quicker adjustments to interest rate changes.
Prepay or make partial prepayments: If you have additional funds, making prepayments can reduce the principal balance on your loan, leading to significant interest savings over time. Even small partial prepayments can have a positive impact.
Negotiate with your lender: If you are stuck with a higher rate, don't hesitate to negotiate with your bank for a better rate, especially if you have a history of being a loyal customer.
How much can you save with a rate cut?
While exact predictions are difficult, experts suggest that a reduction of up to 50-100 basis points (bps) is possible in 2025. If the Reserve Bank of India (RBI) decides to reduce interest rates in the coming months, borrowers could see a reduction in their monthly EMIs. The extent of the savings depends on various factors like the loan amount, the current interest rate, and the loan tenure.
For example, Let’s assume you’ve taken a loan of ₹50 lakh at an interest rate of 7.5% for 20 years.
Calculating the current EMI by using the formula:
= ₹40,280
After a 0.5% rate cut on the current interest rate (0.5% on 7%), the new EMI would be ₹38,764
Therefore, monthly savings:
₹40,280−₹38,764 = ₹1,516
And annual savings:
₹1,516 ×12= ₹18,192
What’s next for home loan borrowers?
While 2024 has been steady with no interest rate hikes, 2025 could bring opportunities for rate cuts. Staying informed, reviewing your loan terms, and exploring refinancing can help you take advantage of these changes.
