The year 2025 was nothing short of a golden dream for home loan borrowers. After a long wait of nearly five years, the Reserve Bank of India (RBI) eased its monetary policy and began cutting interest rates. The repo rate, which was at 6.5% at the beginning of the year, has now fallen to 5.25%. This reduction has directly impacted your home loan EMI.
But now, the question on every borrower’s mind is whether this trend of home loan reductions will continue in 2026. In this detailed report, we will understand how RBI’s decisions affect your pocket and what leading economists are predicting for 2026.
How does your EMI decrease?
A major change occurred in 2019 when banks linked floating-rate retail loans, such as home loans, to an external benchmark. Most banks in India use the repo rate as their benchmark, which means that as soon as the RBI changes the repo rate, banks are forced to immediately adjust their home loan rates.
When the RBI reduces the repo rate, it becomes cheaper for banks to borrow from the Reserve Bank, and they pass this benefit directly to customers. Conversely, when the repo rate increases, your EMI burden increases. A total reduction of 1.25% in 2025 has revitalized the home loan market, and as a result, banks have provided significant relief to their customers.
Reductions from February to December
This year, the RBI has reduced interest rates in installments, giving the market ample opportunity to recover. The first reduction was of 0.25% in February, bringing the rate to 6.25%. This was followed by another 0.25% reduction in April, and a major reduction of 0.50% in June, bringing the rate to 5.50%. Recently, after another 0.25% cut in early December, the repo rate now stands at 5.25%.
Due to this significant reduction, home loan rates for major banks like Bank of India, SBI, HDFC, and ICICI Bank now range between 7.1% and 7.9%. This change has not only benefited new homebuyers but has also significantly reduced the monthly installments of existing borrowers.
Old Borrowers Hit the Jackpot
The 1.25% reduction in the repo rate has brought significant relief not only to new borrowers but also to existing borrowers. Suppose you took out a home loan of ₹50 lakh in January 2025 at a rate of 8.5% for 20 years. If you choose to reduce your loan tenure after this reduction, your loan tenure will be reduced from 240 months to just 198 months, saving you approximately ₹18.32 lakh in interest.
In contrast, if you reduce your EMI, your total interest savings will only be around ₹9.29 lakh. Financial experts always recommend reducing the loan term to reduce the overall interest burden and become debt-free sooner.
Will buying a home become even cheaper?
Economists believe that this trend of falling rates is far from over. According to Siddharth Sanyal, Chief Economist at Bandhan Bank, inflation is expected to remain around 3% over the next 12 months, and the real rate is currently well above the RBI’s neutral rate. This directly indicates that the RBI may cut the repo rate by another 0.25% in the review meeting to be held in February 2026.
If this happens, home loan rates could move closer to the psychological level of 7% in 2026, which would be a great opportunity for those dreaming of owning a home. The liquidity of the market and the falling inflation figures are testifying that the dream of owning a house is going to become even cheaper next year.