Home loan switch: How refinancing after RBI rate cuts can save you lakhs
The Economic Times·2026-02-02 01:00

Core Insights - The Reserve Bank of India (RBI) has reduced the repo rate by 125 basis points from February to December 2025, but not all lenders have passed on these benefits uniformly to borrowers [1][3][24] - Existing home loan borrowers have benefited from the rate cuts, while new borrowers may not see the same advantages due to uneven transmission of rate cuts by banks [2][3][20] - Borrowers are encouraged to negotiate better loan terms and consider switching lenders to take advantage of lower interest rates [4][12][34] Borrower Experience - Sunny Thakor switched his home loan from an NBFC to a bank, saving Rs. 45.3 lakh over the new loan tenure by obtaining a lower interest rate of 7.25% [5][6][35] - Hasan Akhtar made regular part prepayments on his loan, reducing his tenure from 20 years to 11 years and saving Rs. 25.6 lakh in interest [8][31][32] Market Dynamics - The external benchmarking framework for banks requires them to pass on repo rate changes, but non-banking financial companies (NBFCs) do not have the same obligation, leading to sub-optimal transmission of rate cuts [9][10][11] - The complexity of NBFCs' cost-of-funds structures complicates effective monitoring and transmission of rate cuts to consumers [10][11] Recommendations for Borrowers - Borrowers should actively monitor interest rates from other lenders and consider switching if significant savings are possible [4][12][34] - Making part prepayments and increasing equated monthly installments (EMIs) can help reduce overall interest outgo and shorten loan tenure [31][32][33] Regulatory Framework - The RBI mandates that banks must reset rates at least quarterly under the external benchmarking regime, which can lead to a lag in visible reductions in loan rates for borrowers [25][26] - A significant portion of outstanding floating-rate loans are still linked to older benchmarks like MCLR, which do not provide the same transparency in policy transmission as the external benchmarking framework [24][25]