The rate cuts will particularly benefit borrowers who took home loans in 2020-2022 at rates of 6-6.5%, but saw the rates rise to 9-9.5% within a year following the central bank’s cumulative repo-rate hike of 225bps between May 2022 and March 2023. A basis point is one-hundredth of a percentage point.

Repo-linked lending dominates the retail loan market, so even a small cut ripples quickly through borrowing costs, lowering interest outgo for the borrower over the loan tenure.

Punjab National Bank (PNB) has lowered its repo-linked lending rate (RLLR) by 25bps, following the RBI’s repo-rate cut. Other major banks are yet to announce their RLLR cuts.

Rate cut transmission

When the RBI trims the repo rate, transmission to home loan rates depends primarily on the borrower’s loan structure. Existing borrowers whose loans are pegged to external benchmark rates, such as the repo rate, will see the revised rate applied to their next scheduled reset date, said Jagadeesh Mohan, co-founder of EMI Saver.

With most banks operating on monthly resets, the 25-bps cut announced on 5 December should show up in EMIs (equated monthly installments) or loan statements by the end of the month. “No paperwork or request is required. Customers can verify the change through their loan portal or bank notifications,” Mohan added.

In most cases, interest rates of repo-linked loans move in sync with the policy rate, which means a 25-bps cut should translate into a 25-bps cut in your loan interest rate. The final rate, however, is the benchmark plus a fixed spread determined by the bank. If the spread remains unchanged, borrowers should see a near-identical reduction.

Prospective borrowers should wait at least one month to benefit from the revised rates. “For new borrowers, banks may decide how much of the rate cut to pass on based on their pricing strategy and market competition. Revised offers generally become available from the following month onwards,” he said.

Loan repayment strategy

With policy rates trending downwards, borrowers should reassess their loan terms and market options. When banks revise interest rates in line with changes in key policy rates, their default option is to adjust the loan tenure. However, if you prefer lower EMIs to free up your disposable income, you will need to ask the bank to reduce your EMIs.

Second, if your bank doesn’t fully transmit the rate cuts, you must negotiate for a lower rate if you have a good credit score. However, most private banks charge a fee to reduce the interest rate. It would help to check the prevailing market rates to compare where your loan rate stands. If your effective rate is materially higher than prevailing market levels, it may even be time to change your lender.

Mohan said switching lenders (balance transfer) is usually beneficial if the rate difference is 50bps or more, since time, effort, and some charges are involved.

The rate cycle is turning in borrowers’ favour. Use this window to optimize your loan terms and lock in long-term savings.