RBI’s New Credit Score Rules May Help Cut Home Loan Rates, Benefit Home Loan Borrowers

The Reserve Bank of India (RBI) issued the Reserve Bank of India (Interest Rate on Advances) (Amendment) Directions, 2025 on September 29, 2025, which came into effect from October 1, 2025. The directions allow banks to reduce the spread charged on a floating-rate loan before the three-year lock-in period that was previously followed. This reduction can be done for customer retention and on grounds which the bank can justify. However, it must be applied in a non-discriminatory manner.

Bank set floating rates on home loans based on an external benchmark and a spread. The spread incorporates the credit risk premium attached to the borrower’s credit profile. When a borrower applies for a home loan, their credit score and income/repayment capacity determines the rate of interest that would be offered. A good credit score usually helps the borrower negotiate a lower rate of interest.

In the present system, even if a borrower’s credit score improves after availing of the loan, most banks undertake a review only after three years. Until then, the spread remains the same. The new directions allow banks to assess a borrower’s credit risk earlier and reduce the spread if the borrower’s profile has improved meaningfully.

How The Review Works

In order to get the reduced spread, the borrower has to reach out to the bank. The new guidelines are silent on making the process automatic. First, the bank will conduct a credit assessment to see whether the credit profile of the borrower has changed significantly from the time of taking the loan. The assessment should be done in line with the terms agreed upon in the loan contract.

If the bank feels that the creditworthiness of the borrower has increased, it can reduce the credit risk premium within the spread, which would reflect in an overall lowering of the interest rate. A significant change will include an increased credit score, lower debt, steady repayment behaviour, or a better financial position. The bank will make that decision based on the updated credit report and other supportive data.

When Will the Directions Apply

The new rules came into effect on October 1, 2025. Banks are, however, not obliged to proactively review spreads. The process needs to be initiated by the borrower.

Impact on Existing Borrowers

While the previous three-year lock-in period normally meant that existing borrowers remained with the same spread even after they had become financially stronger, new borrowers with strong credit profiles will benefit after a shorter period.

Home loans are typically of long tenures, ranging from 20-25 years. During this period, many borrowers see improvement in their credit scores due to timely repayments and better financial discipline. Under the earlier approach, this improvement did not necessarily result in an early cut in interest rates. The fresh directions allow borrowers to seek the benefit earlier, provided their credit profile supports it.

Possible Savings From A Lower Rate

Home loan amounts, on an average, range from Rs 25 lakh to Rs 75 lakh. Over such large amounts and long tenures, even a small reduction by around 0.25 per cent can change the total interest paid over the loan period. The actual savings depend upon the balance, the remaining tenure, and the revised rate of interest.

Borrowers can choose in which way the reduction should be applied. It can lower the equated monthly instalments (EMIs) or reduce the tenure. A shorter tenure further reduces the overall interest burden, since interest is calculated over fewer months.

Credit Score Factors Considered by Banks

On-time EMI and credit card dues payment has the highest weightage. Delays in repayments may hurt the credit score. Credit utilisation ratio is also a critical factor. A low credit utilisation ratio denotes controlled usage of credit facilities.

A balanced blend of secured and unsecured credit generally favours a healthier score. Submitting multiple applications for loans or credit cards in a short span of time often results in multiple enquiries, which can temporarily lower the score. Keeping only one application at a time ensures stability in the situation. The older the credit accounts, the stronger the credit history; therefore, most borrowers retain long-standing credit cards active, even if the usage is rare.

Smoother Path to Early Reduction

The new directions make the structure more flexible for borrowers whose credit profile improves during the loan tenure. If they request a reassessment, and the bank finds the improvement substantial, they may receive the benefit of lower rates earlier than before.

The instructions do not alter the external benchmark system or the manner in which floating rates operate. The only change is that the bank will be able to reduce the spread earlier than before.

This allows the borrowers to take advantage of a review when their financial position strengthens, without having to wait for three years. Yet the entire process is still at the bank’s discretion and up to the conditions in the loan agreement. In essence, this means that borrowers will have to go through the bank’s process, send the necessary documents, and wait for its decision on their loan rate.