Home loans set to fall to historic low of 7.1% with rate cut

MUMBAI: Home loan rates are set to drop to levels last seen briefly during the Covid pandemic , with the RBI’s monetary policy committee reducing the repo rate by 25 basis points to 5.25%.


Several banks — Union Bank, Bank of India, Bank of Maharashtra and Indian Overseas Bank — currently offer home loans at 7.35%. Borrowers at this rate will see their interest rate decline to 7.1%, which is also the deposit rate offered by some private banks. On a Rs 1 crore home loan for 15 years, a 0.25 percentage-point reduction in the rate reduces the EMI by roughly Rs 1,440 per month.



Bankers say that for home loans to be priced at 7.1% for new borrowers, lenders will have to sharply cut deposit rates or revise the spread over the benchmark rate. If this happens, new borrowers could end up paying more interest than existing floating-rate borrowers.

While banks will see a compression in net interest margins until deposit rates fall, non-banking finance companies will benefit immediately because of lower funding costs. “For the NBFC sector, and specifically for last-mile financiers like Shriram Finance, this policy is a significant enabler. The continued neutral stance, combined with the Rs 1 lakh crore OMO purchase announcement, ensures that liquidity remains congenial. This will facilitate the faster transmission of rate cuts to the grassroots level, benefiting the small truck operator, the rural entrepreneur and the MSME borrower, who are the engines of this 8.2% growth,” said Umesh Revankar, executive vice-chairman, Shriram Finance.

Bankers said the reduction in lending rates will push lenders toward greater granularity in credit, chasing small-business loans that offer higher returns. “Most large corporates are already raising funds from outside the banking system through equity and bonds. If you look at RBI credit numbers, it is the MSME and retail segment that is driving credit growth,” said the head of credit at a private bank.

Although lenders are seeking higher-yielding loans, they remain wary of defaults. RBI data on sectoral deployment of bank credit shows that banks are shifting toward secured loans such as gold and auto loans and away from unsecured personal loans.