Falling Interest Rates: What Should New and Existing Home Loan Takers Do?

After a 33-month wait, borrowers got their first relief as the Reserve Bank of India (RBI) cut interest rates (repo) in February this year and followed it up with another reduction in April. A total of 50 basis points was cut in these two monetary policy meetings.

With inflation staying well under control, even as growth as well as consumption stutter, there are expectations of more rate cuts (at least two) in CY25.

As the single-largest debt taken home loans stand out as a means to finance property purchase for a wide swathe of borrowers across income categories.

The banking regulator mandates passing on rate cuts to borrowers, more so for repo rate linked loans. With two rate cuts done and more on the anvil, new and existing borrowers may have much to cheer about.

But should a fresh borrower rush to take a home loan to finance her dream house just because interest rates are attractive?

What should current borrowers do, now that they have lower EMIs to service? Lower loan tenure or reduce their EMIs?

And when banks don’t give you a good deal even after rates are reduced, should you immediately opt for a balance transfer?

We seek to give insights on all these aspects and workout the numbers, so that you as a borrower can take informed decisions.

Before rushing for the loan

The basic aspect to consider is whether you will be settling down in the city and the property you wish to buy via home loans. If your career is going to take you around the country or you shift jobs every few years – which can cause a change of mind on the eventual settling location – you may be better off renting a place till you become certain. So, say, a decade or more into your work career (in your mid or late 30s), you would have a better idea on where you would wind up, besides being in a financially-stronger position as well.

Otherwise, you would have a leveraged asset for which you would need to find tenants, maintain the property and pay the monthly charges to the apartment society if you leave it empty.

Rental yields in the top seven cities in India range from 3-4 per cent and so there is little justification for a leveraged property purchase just for rent’s sake. For comparison, the US rental yields are 6-8 per cent (higher in some larger and richer cities), while for the UK it is north of 6 per cent.

As mentioned at the start, the falling interest is a draw for some to take home loans. One critical point to note here is your credit score – that is measured by specialised agencies and reflect your credit worthiness (based on several criteria and measured on a maximum score of 900) – determines the interest rate you will get from your lender. Higher the credit score, better the chances of the bank offering you a lower interest rate.

Someone having a credit score of 800 or more, say, would pay much lower interest than a borrower with a score of, say, 600.

So, Indian banks may offer 8 per cent or a bit less for someone having 750-800 as credit score. A borrower with 650 credit score may end up paying 9-9.5 per cent.

Typically, for every 50 points lower credit score, the interest rate may increase by 25 basis points.

 These are broad-based pointers and figures can vary significantly for individual banks and NBFCs.

All those bank ads that promote low interest rates (sub-8 per cent) may be available to the best of the creditworthy persons. Your interest rate would thus vary accordingly, based on your credit standing.

The next factor is readying the down-payment. Banks and NBFCs generally provide 75-80 per cent of the total property value as loan. The remaining portion is to be paid by you – in full upfront in case you book a ready-to-move-in house and the loan repayment starts immediately. Ideally, this must come from surplus cash and not from breaking your investments, unless you have specifically saved for the down-payment itself.

The next important monitorable while taking a home loan is the debt-to-income ratio. That is, what proportion of your income (after tax) goes into servicing the home loan, becomes a key parameter not just for you, but a deciding factor for sanctioning even for the lending bank itself.

Ideally, not more than 40 per cent of your income should go into paying your EMI.

As a related point, if you have too many existing loans and credit card dues that take away a significant portion of your income, you should take extra care before availing a home loan.

All EMIs, including those related to the home loan, should not exceed 50 per cent of your income and must revert to much less than 40 per cent as your income grows.

Many tend to take home loans with the belief that they would give strong tax benefits.

As such, taking in debt for tax benefits itself is not such a desirable choice. Principal repayment of up to ₹1.5 lakh is allowed for deduction under section 80C (which is already overcrowded with too many options). Interest paid towards home loan up to ₹2 lakh is allowed as deduction under section 24(b). If you take a loan jointly with your spouse, each person can take the ₹2 lakh benefit.

However, the new tax regime (from FY26) allows up to ₹12 lakh as tax free (rebate). Also, the 30 per cent tax slab kicks in only beyond ₹24 lakh; so you need to see if these deductions are of any significance to you.

Finally, given the current uncertain business environment in paymaster industries such as IT and product companies, with layoffs, anaemic salary hikes and AI disruptions still playing out, you must evaluate how things stand in your own company.

If it’s a large joint loan, you must also carefully assess if your spouse’s firm is not into manpower chopping in the current environment.

Decreasing EMIs vs reducing tenor

While the above discussions pertain to new home loan takers, those already servicing debt also have decisions to take when interest rates go down further.

The decision-making process is best explained with an example.

We have taken a case of a person who has taken ₹1-crore home loan for a period of 25 years at an interest rate of 9 per cent. The EMI works out to ₹83,290.

Now after five years, it is assumed that the interest rate has come down to 8.5 per cent and is expected to continue at that level for the remaining 20 years. The new EMI works out to ₹80,944.

There are two options before you. First is to continue at the original EMI and save on the tenor. Alternatively, you can keep the loan repayment period unchanged while paying the reduced EMI.

The numbers are fairly clear on the better option if you care to continue with the original EMI.

If you keep the tenor the same with the new EMI, you save ₹7.14 lakh in interest. However, reducing the tenor by paying the original EMI would mean a saving of ₹17.38 lakh. Both these figures are in relation to what you would have paid with the original 9 per cent interest.

By choosing to pay the original EMI, you reduce your loan closure by 20 months – you save 20 EMIs.

With more rate cuts expected over the course of this year and the next, your savings could be even higher if you keep paying the unchanged monthly home loan instalment. Therefore, barring circumstance where you need that extra bit of cash, maintaining the original EMI in a reducing interest rate scenario can result in hefty savings.

These calculations are good indicators, though actual scenarios could be a bit more dynamic with cycles of rate hikes and cuts. But broadly, keeping EMIs unchanged can help save on interest substantially over longer tenors.

Moving your loan – Balance transfer

Your financial circumstances keep changing over time. As your earnings increase over the years. You may have repaid other loans and credit card dues, and so your credit score may be higher than when you first took a home loan.

Now, if your bank does not recognise your improved financial position and does not pass on RBI’s interest rate cuts in full, you may have reason to consider other options, including changing lenders.

Of course, poor service levels with issues relating to monthly debits from your loan account, indifferent attitude of bank staff when you have queries or issues relating to your mortgage are some additional reasons, though monetary considerations take precedence.

Ensure that the rate difference offered by the new bank vis-à-vis your existing lender is reasonably large – closer to 50 basis points.

If you do not get a good deal even after repeated negotiations with your bank, you can consider transferring your outstanding balance to another lender.

A couple of other points need to be highlighted.

Balance transfers are financially beneficial relatively early in your loan tenor – say, after four-five years in a 20-year mortgage period. That’s when you will be servicing higher interest and lower principal.

Avoid moving your loan in the last few years of your loan tenor.

It also makes sense to transfer your balance when the outstanding amount is larger.

While the above aspects need considerations, you must also be aware of the charges that come with moving your home loan elsewhere.

Before switching out, you must satisfy some eligibility conditions for a balance transfer. Some banks and NBFCs require you to have serviced at least 12-24 months of EMIs with your current lender. 

If you are on a fixed interest loan, switching to a new lender can indeed be quite expensive. Your current lender can charge 1-3 per cent of the outstanding loan amount for repaying earlier than originally scheduled.

But when you are on a floating rate regime, you can switch to another lender without any prepayment charges, as the RBI expressly prohibits levy of prepayment charges on floating rate loans.

The first is the processing fee charged by all banks and NBFCs. Most private banks charge about 0.5 per cent as processing fee. Some public sector banks charge nothing, while others have zero fee for ready-to-move-in houses and balance transfers. New-age banks and some NBFCs could charge up to 4 per cent as processing fee.

However, these are stated numbers on their websites. You could visit these banks or NBFCs and work out a much better deal. Based on your negotiation, you can reduce or even do away with processing charges.

Legal and technical assessment charges come next and could range from ₹5,000 to ₹20,000. Some banks include these in the processing fee, and so you can negotiate harder as there would have been a legal opinion taken even while applying to your existing lender.

Then there is the memorandum of deposit of title deed (MODT). It indicates that you have handed over the property’s documents to the new lender. This deed has to be registered. MODT charges range from 0.1-0.5 per cent of the loan amount and are not negotiable. They vary from State to State. Some States have a flat fee or percentage of loan amount in the same range mentioned earlier for mortgage of title deed (the equivalent of MODT).

Franking charges are also incurred. The property sale document and the loan agreement have to be stamped or franked at the sub-registrar’s office. These charges are levied by the respective State governments. The charges typically range at 0.1-0.2 per cent of your loan amount and are paid while changing lenders. Franking charges are non-negotiable.

Finally, if you wish to move your outstanding balance to another lender with overdraft features, then the interest rates applicable would be higher to the tune of 0.25-0.5 per cent.

Ignoring opportunity costs

One aspect we have not considered is the opportunity cost involved in investing the saving (₹2,976 in our example) on EMIs when rates go down. Here are some key reasons why the exercise may not be too fruitful.

For one, from a financial planning perspective reducing loans and being debt free are the priorities for savers. Besides, loan servicing and investment planning must not be mixed.

Next, as we have emphasised in the article, the home loan itself must be taken only if the house is for self-occupation and not as an investment. Such being the case, calculating any opportunity cost on a self-occupied house is futile.

Then, there are operational aspects of investing elsewhere (mutual fund SIPs) as well. First, only a little over half the investors in India hold equity mutual funds for more than two years. So, when loan tenors of 15-25 years are spoken about, the average equity fund investor holds schemes for much shorter durations. Second, market vagaries can cause investors to go slow or even stop SIPs. For instance, SIP stoppage ratio (ratio of SIPs stopped/matured to new SIPs) has been rising over the past year and has touched a record 296 per cent in April 2025. So, it may be a stretch to expect the average investor to continue SIPs for decades. Finally, there is a question of selecting the right scheme itself.

In light of these factors, we have refrained from bringing home loan savings into the investment and opportunity cost ambit.

Published on May 24, 2025

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