With home loan interest rates falling after RBI rate cut, should you refinance or prepay?
In June 2025, the Reserve Bank of India (RBI) reduced the repo rate by 50 basis points, marking the beginning of a measured rate cut cycle. This move followed a sharp decline in retail inflation, which dropped to a six-year low of 2.10 per cent. Additionally, bond yields have remained steady, signalling the possibility of further policy interventions.
This shift in the interest rate environment has already begun to impact home loan rates, which are becoming increasingly lucrative to aspirational borrowers. Several prominent banks and lending institutions are now offering home loans starting at 7.45 per cent per annum, compared to around 8.20 per cent last year.
Home loan interest rates July 2025
| Bank | Up to ₹30 lakh | ₹30-75 lakh | Above ₹75 lakh |
|---|---|---|---|
| State Bank of India | 7.50% – 8.70% | 7.50% – 8.70% | 7.50% – 8.70% |
| Bank of Baroda | 7.45% – 9.25% | 7.45% – 9.25% | 7.45% – 9.25% |
| HDFC Bank | 7.90% onwards | 7.90% onwards | 7.90% onwards |
| ICICI Bank | 8.00% onwards | 8.00% onwards | 8.00% onwards |
| Kotak Mahindra Bank | 7.99% onwards | 7.99% onwards | 7.99% onwards |
Note: Interest rates discussed above are illustrative in nature and may vary based on borrower profile, loan amount, and tenure. Please check with the respective lending institutions official website for the most accurate and updated interest rates, associated terms and conditions.
Basic difference between refinance and prepay
| Factor | Refinance (balance transfer) | Prepay (part/full payment) |
|---|---|---|
| Goal | Lower interest rate | Reduce loan principal and total interest |
| Best time | Early in loan tenure | Anytime surplus funds are available |
| Cost involved | Processing & legal fees | Usually zero (especially for floating rate loans) |
| Paperwork | Moderate to high | Minimal |
| Impact | Lowers EMI and/or tenure | Reduces principal and total interest |
| Risk | May incur switching costs | May impact liquidity if emergency funds are used |
Note: The differences discussed above are illustrative in nature. Refinance works best if your current loan rate is much higher than the market. Prepaying is ideal when you have surplus funds. Always evaluate total costs, suggestions of financial advisors and long-term financial goals before choosing either.
Refinance to take advantage of cheaper rates
Borrowers locked into older loans with higher interest rates may consider refinancing, especially if the rate difference exceeds 50 basis points. Refinancing, also known as a balance transfer, can lead to substantial interest savings, particularly when done during the early years of the loan, when the interest outgo is highest.
Still, it is prudent to consult financial advisors and tax professionals to understand the total switching costs. Processing fees, legal charges, hidden costs, and documentation expenses can erode the overall benefits of refinancing if not properly accounted for. As a first step, negotiating with your existing lender is often considered a smart move.
Prepaying works, too, but conditionally
Partial or full prepayment can significantly reduce the total interest paid over the loan tenure. If a borrower receives a bonus or has surplus funds, they can consider making a lump sum payment. However, such a move should not come at the cost of depleting emergency savings or long-term investments.
Atul Monga, CEO and co-founder of BASIC Home Loan, explained this concept further: “Prepaying a home loan can reduce your principal and interest burden. If market rates are far lower than your current rate, refinancing may also be wise. Just ensure you factor in switching costs and align the decision with long-term financial goals.”
Choose based on your financial objective
Hence, considering the above factors, the best option, in comparison to refinancing or prepayment, ultimately depends on your current home loan interest rate, tenure left, repayment potential and overall long-term financial strategy.
In a falling rate regime, evaluating the pros and cons of both options carefully after proper consultation with a financial advisor can help you optimise your housing loans in the most efficient way possible.
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