Explained: Why Your Home Loan Interest Rates May Not Have Dropped Despite RBI’s Rate Cuts

The Reserve Bank of India (RBI) has been busy! After keeping interest rates steady for a long time, they've now cut the key lending rate (called the repo rate) by a total of 50 points this year, with cuts in February and April. This signals that the RBI wants to make borrowing cheaper, hoping to boost the economy.

The Mystery of the Missing Savings

Despite these rate cuts, many existing home loan borrowers are feeling frustrated. They've only seen their loan interest rates drop by a small amount, sometimes just 10 or 25 points, even though the RBI has cut rates by 50 points in total. This raises a common question: why aren't banks passing on the full benefit of these rate cuts?

Why the Delay in Reducing Home Loan Interest Rates?

The main reason for this delay lies in how banks get their money. When the RBI raises rates, it immediately costs banks more to borrow, so they quickly pass on that cost to their customers to protect their profits. However, when the RBI lowers rates, banks still have to pay higher interest on deposits they've already taken from customers (like fixed deposits). This means their overall cost of funds doesn't drop as quickly. As a result, they pass on the benefits of rate cuts slowly, if at all.

Your Loan's Benchmark Matters

Another big reason your interest rate might not be falling is the type of interest rate your loan is linked to. Home loans in India are generally connected to one of these:

• Repo Linked Lending Rate (RLLR)/External Benchmark Rate (EBR): This is directly tied to the RBI's repo rate and usually passes on changes quickly. This system was introduced in October 2019.
• Marginal Cost of Funds Based Lending Rate (MCLR): This is an older system where rate changes are passed on more slowly.
• Retail Prime Lending Rate (RPLR): This is mostly used by housing finance companies and can be less clear and slower to change with RBI policy.

If your home loan is still linked to MCLR or RPLR, you likely haven't seen the full benefit of the recent rate cuts. 

What Can You Do to Reduce Home Loan Interest Rates in FY25?

If you're looking to save money on your home loan, here's what you can do:

1. Check Your Loan Benchmark: Find out if your loan is linked to RLLR. If not, consider switching to an RLLR-based loan. The RBI says banks must offer this option and send you reminders. There's usually a small fee for this switch; for example, HDFC charges 0.25% of the loan amount or Rs 5,000 (whichever is lower), and SBI charges Rs 1,000. This small fee can lead to big savings over time.
2. Consider Switching Lenders: If staying with your current bank doesn't offer enough benefit, look into transferring your loan to another bank that offers better rates and service. Just be sure to compare all the costs involved, like processing fees and legal charges.
3. Negotiate: You can also use a good offer from another bank as leverage to negotiate with your current lender. They might match the offer to keep your business.

Read more on: Dreaming of ₹30 Lakh vs. a ₹40 Lakh Home: What’s the Real Cost?

Conclusion 

While the RBI is working to lower borrowing costs, existing home loan borrowers might need to be proactive to fully benefit. Understanding your loan's benchmark and exploring options like switching to RLLR or transferring your loan can help you save money in the long run.
 
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