Improved credit score? RBI rule change can help you slash your home loan EMI faster

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As per the "Interest Rate on Advances Amendment Directions, 2025" of the Reserve Bank of India, banks are allowed to reduce the "spread" they charge on a floating-rate loan before three years are over, provided they are doing it on justifiable grounds in a fair and non-discriminatory manner.

Quite simply, if your credit profile has strengthened since you borrowed the money, the bank now has regulatory leeway to reduce your rate earlier than before. You would, however, have to approach the bank and ask for a re-evaluation. The bank would then look at whether there is a "substantial" enhancement in your risk profile compared to that provided in your loan contract. If the assessment is positive, it can reduce the credit risk premium and drop your effective interest rate.

How banks decide your home loan rate

In case of a floating-rate home loan, the bank's rate is built from two parts-an external benchmark and a spread. The external benchmark could be the RBI repo rate, or a three-month or six-month Government of India treasury bill yield, or any other benchmark rate published by FBIL. The bank adds its spread to this benchmark, which reflects its margin, operating costs, the risk it assigns to you based on your credit score and profile, and features of the loan such as tenure.

The new directions from the RBI have a direct bearing on this second component. Once your credit score has improved, and your overall risk profile therefore looks better, you can ask the bank to revise the spread. A lower spread on the same benchmark rate automatically means a lower interest rate on your loan.

From when do these new rules apply?

The updated guidelines become effective from 1 October 2025. It is not an automatic benefit; nothing will move unless you make the first move. You need to approach your bank, request a credit re-evaluation and specifically ask that your spread be reduced if you think your credit score and overall debt profile has improved.

Why this matters for existing borrowers

Earlier, the practical benefit of improved credit scores flowed only to new borrowers. Existing customers of home loans usually had to wait for a three-year lock-in before the bank re-visited the spread on the loan. With the lock-in removed now, you do not have to sit tight for years. The moment you have a meaningfully better profile, you can ask for a review.

If the bank agrees that your risk has come down, it can reduce your rate of interest with immediate effect. That reduced rate can be used either to bring down your EMI while keeping the tenure unchanged or to keep the EMI constant and shave years off your repayment period. For a long-tenure home loan of 20–25 years, even a cut of 0.25 percentage points can translate into sizable interest savings over the full tenure.

Why improving your credit score is now even more important

These rules give borrowers a direct financial incentive to work on their credit score. Paying EMIs and credit card dues regularly and on time is still the single biggest driver of a healthy score. Keeping your credit utilization under control, so that only a sensible portion of your income goes towards EMIs each month, also helps in maintaining a good score.

Of course, a balanced mix of secured loans, such as on homes or vehicles, and unsecured credit, like personal loans and credit cards, further strengthens your profile. Besides, it is better to avoid multiple applications for loans or cards in a very short period because each hard enquiry tends to weigh your score down temporarily. Lastly, rather than hastily closing an old card, try converting it into a lifetime-free card and use it from time to time so that your long credit history will continue to work in your favour.

The bottom line

With the amendment from RBI in 2025, a better credit score is not only about future loans. It would facilitate lowering the rate on your existing home loan faster than before, reduce your interest outgo, and probably become debt-free faster—provided you proactively ask your bank to pass on the benefit.

1. FAQ: Will the bank necessarily have to reduce my home loan rate if my credit score increases?

No. The RBI guidelines allow banks to decrease the spread before three years; they do not compel them to do so. There must be a significant enhancement in your credit profile, the bank says, with respect to conditions in your loan agreement. If the bank perceives no material risk reduction, it can deny a rate cut.

FAQ 2: How often can I request that the bank recalculate my credit spread?

While the directions by the RBI do not fix the number of times you can ask, it is sensible to approach the bank only when there is a clear change in your credit score or overall debt profile-for example, a big jump in score, repayment of a major loan, or a sustained track record of timely payments-rather than asking frequently for no real change.

3. FAQ: When the rate is cut, is it better to reduce my EMI or my loan tenure?

If cash flow is tight, you might prefer the lower EMI to ease the monthly strain. But if you can easily afford the current EMI, keeping the EMI the same but reducing the tenure normally gives you higher interest savings during the entire life of the loan. It's a good idea to have the bank give you both options and to compare the total interest outgo before deciding on one.