For home loan borrowers, 2024 has been a year to forget due to high interest rates. However, things will likely change for the better as the interest rate cycle is expected to turn around, and the year 2025 may see a series of rate cuts bring much-needed relief for home borrowers. Though RBI has paused the repo rates for the eleventh consecutive time in its bimonthly MPC meeting, many experts believe the interest rate cut cycle will likely begin very soon in 2025.

The central bank has reduced the CRR to address the liquidity concerns in the banking system. "By reducing the CRR from 4.5% to 4%, the RBI has freed up additional funds in the banking system, enabling banks to lend more. This move is expected to lower lending rates, making home and personal loans more affordable for borrowers. Reduced borrowing costs can lighten Equated Monthly Installments (EMIs), encourage credit uptake, and stimulate sectors such as housing and small businesses, thereby supporting economic growth while easing financial burdens on borrowers," says Raoul Kapoor, Co-CEO of Andromeda Sales and Distribution Pvt Ltd.

If you are a home loan borrower, how soon can you expect your home loan EMIs to come down, and what could be the quantum of interest rate fall? What should you do to maximize your gains in falling interest rate scenarios? Read on to find out.

DEMAND FOR RATE CUTS GOT STRONGER AFTER THE DECLINE IN GDP GROWTH

GDP growth for the quarter ending September 2024 was 5.4% y-o-y, which is a big disappointment. This fall has strengthened the voices demanding interest rate cuts. However, things are likely to improve soon.

"Our 100-indicators study suggests that 55% of the economy continues to grow at a positive sequential clip, though last quarter a higher 65% was growing positively. Urban consumption has slowed sharply, explaining much of the slowdown. We believe rural consumption and higher government spending will lift GDP growth a shade over the next two quarters," says HSBC Research Report.

RISING INFLATION HAS PREVENTED INTEREST RATE FALL

India's growth is normalizing to more sustainable but still strong levels. "Inflation is elevated now, but we expect it to fall from November and dip below 5% by March. Lingering external uncertainty may lead to a shallow repo rate cutting cycle starting February; softer growth will likely spur liquidity infusion sooner, starting 6 December," says the HSBC Research Report.

INFLATION IS LIKELY TO SUBSIDE SOON CREATING ROOM FOR A RATE CUT

Though inflation has risen suddenly, there are signs that it may subside in the coming months. "Core inflation has been kept low by imported disinflation from China and the RBI's credibility, keeping inflation expectations anchored. All said headline inflation is likely to fall to 5.7% in November (from 6.2% in October) and dip under 5% by March," says the HSBC Research Report.

"RBI is likely to reduce rates in February policy, once inflation starts easing again. 2 out of 6 MPC members voted for a rate cut, which shows that the possibility of a rate cut in February is very high," says Sandeep Bagla, CEO of TRUST Mutual Fund.

HOW MUCH INTEREST RATE CUT IS LIKELY IN 2025

Though RBI has not gone for a repo rate cut in December, the central bank is most likely to do so in coming MPC meetings in 2025. "If and when the USD stabilizes or retracts, Emerging Markets such as India may find an opportunity to ease. We expect two repo rate cuts of 25bps over February and April, taking the repo rate to 6%. Our real rate maths suggests that this will be a shallow rate-cutting cycle of 50bps," says a report from HSBC Research.

However, others expect the rate cut in 2025 to be much bigger than 50 bps. Japanese investment bank Nomura expects the RBI to deliver deeper rate cuts of up to 100 bps in 2025.

WHAT SHOULD HOME LOAN BORROWERS DO IN FALLING INTEREST RATE SCENARIO

Any fall in interest rates will bring substantial savings to home loan borrowers. "With more liquidity available, we anticipate that banks may pass on some of the benefits to borrowers through lower interest rates. A reduction in interest rates will particularly benefit high-ticket borrowers, such as those taking home loans, by reducing EMIs. We believe this shift could prompt home buyers who have been waiting on the sidelines to finally make their purchase decisions," says Sahil Agarwal, CBO, Nimbus Projects Limited.

Once the interest rate falls, your home loan will be impacted in two different ways. The first option is to keep paying the same EMI despite a rate cut, as it will accelerate your loan repayment, which will be paid off much earlier. The second option is to keep the tenure intact and go for a reduced EMI. However, this option makes you pay a bigger interest amount than the former scenario. So, go for a reduced EMI only when you are facing a cash flow problem.

If you wish to to maximize the benefits of the falling interest rate cycle; you need to ensure that your loan regime is the external benchmark-linked lending rate (EBLR). Check with your bank to see if your loan regime is under any other old regime, like BPLR, Base Rate, or MCLR. If yes, you need to apply for a change to EBLR.

If you have taken out sticking with a lender who has a reputation for giving home loans from an NBFC or a housing finance company; you do not have the option to switch to EBLR. You would be better off sticking with a lender with a reputation for offering the most competitive rates on home loans to its existing borrowers.

If your existing home loan lender is charging a higher rate than what other lenders are offering, you can ask your lender to reprice your home loan to a lower rate. You can also consider refinancing your home loan in case your lender is not offering a lower rate.

"This is a good time to take a moment to review your loan terms. If your interest rate is higher than the current market rate, consider refinancing. If you have extra funds, use them to prepay your loan. This helps lower your principal and reduces the total interest you'll pay," says Adhil Shetty, CEO of Bankbazaar.com.

If you are a new home loan borrower, you will automatically get the benefit of the fall in rate very soon, provided your loan is from a bank. If the loan is from an NBFC, make sure it offers a competitive rate. Even a minor reduction in interest rate may offer a big saving in the long run.