The Reserve Bank of India has cut the repo rate thrice this year, totalling 100 bps. While it held the repo rate unchanged in its monetary policy meeting in early August, SBI recently hiked the home loan interest rate for new borrowers.
Note that the increase in home loan interest rates affect only new borrowers. The interest rate for the existing borrowers remains unchanged.
How Is the Hike Only for New Borrowers, and Not for Existing Borrowers?
For this, we must revisit how the interest rate for the floating rate home loans is calculated.
Home loans (or any floating rate loan) are offered at a Benchmark + Fixed spread + Credit rate spread .
RBI mandates banks to use an external benchmark for their loans. Most banks use RBI repo rate as the external benchmark.
Spread is decided by the bank. For instance, SBI uses External Benchmark rate (EBR) = Repo rate + Fixed spread (not linked to borrower profile). As the repo rate goes up and down, EBR also moves accordingly.
For instance, SBI has set EBR at RBI Repo rate + 2.65%.
Hence, in June 2025, when the RBI cut the repo rate from 6% to 5.5% p.a., SBI EBR fell from 8.65% p.a. (6%+2.65%) to 8.15% p.a. (5.5%+2.65%).
The borrowers must pay EBR + credit spread (depending on the borrower creditworthiness).
The banks cannot easily modify credit spread for the existing borrowers.
However, for the new borrowers, they can simply charge a higher credit spread.
For instance, an old borrower may pay credit spread of 0.5%. Interest rate = EBR + 0.5% = 8.15% + 0.5% = 8.65% p.a.
However, a new borrower with exactly the same credit profile is asked to pay credit spread of 0.75%. Interest rate = EBR + 0.75% = 8.15% + 0.75% = 8.90% p.a.
Why Would SBI Do This?
At a time when the RBI has cut interest rates by 100 bps since the beginning of the year, SBI interest rate hike would have come as a negative surprise to prospective borrowers.
Why would the bank hike home loan rates?
Simple. The bank is uncomfortable with the current interest margins on home loans and simply wants to improve the margins. Going by this LiveMint article, private lenders had already gone slow on home loans because of very fine pricing by the public sector banks. Hence, SBI is just taking a step back from its aggressive loan pricing.
What Should You Do?
A higher rate of interest means a higher EMI, everything else being the same.
As mentioned earlier, this rate hike does not affect the existing borrowers. It affects only the prospective borrowers.
As a new borrower, there is not much you can do.
You can reach out to other lenders for a better deal. Home loans are a commodity. As a borrower, it does not really matter when you borrow from SBI or from ICICI Bank. What matters is the loan interest rate. However, when SBI makes such a move, the other banks tend to follow suit.
I would expect other banks to take cue from SBI and adjust their loan interest rate upwards, if it is already not up to that level. Which bank does not want to earn more from their loans? Yes, there may be a bank or two that may keep home loan interest rates lower simply out of competitive pressure but that’s it. Hopefully, you can get to them before those banks hike interest rates too.
Alternatively, you can try getting a better deal on the property so that the reduced loan amount takes away the pinch of a higher interest rate.
If the aim is to keep the EMI low, you can also opt for a higher downpayment, but that’s also a burden on your pocket.