From October 1, 2025, banks have been allowed to reassess and reduce home loan interest rate spread whenever credit profile of a customer improves. This means if credit score has gone up or debts have reduced — customers can now request bank to lower EMI instead of waiting for years.
If we try to understand in simple language then right now when you take loan from bank, the rate of interest is charged as per your Credit score (CIBIL Score). If your credit score is good then you will have to pay less interest rate. If your credit score is low then you will have to pay more interest rate. For example – if your credit score is 750, you will be charged 7% rate of interest. If your credit score is 700, rate of interest will be 7.5%. If your credit score is 650, then rate of interest will be 8%. This rate of interest is fixed for three years.
Suppose your credit score is 700 so rate of interest will be 7.5% but if after a few months your credit score increases to 750 then also you will be charged interest rate of 7.5%. This is the present condition. Now, RBI has changed this. Now if your credit score increases to 750 then you can ask your bank to review your loan and change rate of interest to 7%.
Now let’s understand in banking terms
Earlier, most home loans in India were floating-rate loans linked to an external benchmark, like the repo rate. The interest rate you paid was made up of two parts:
Interest Rate = Benchmark Rate (e.g., Repo Rate) + Bank’s Spread
The “spread” depends on your credit score, loan tenure, and the bank’s margin.
This was fixed for three years. Under the old system, banks could not change the non-credit-risk portion of the spread for at least three years after the loan was approved. So even if your credit score improved, the bank couldn’t revise your rate before that period. From October 2025, the RBI has removed this three-year lock-in. Now, banks can reduce the spread earlier — as long as they do so on fair and non-discriminatory grounds. Additionally, at the time of interest-rate reset, borrowers will also get the option to switch to a fixed-rate loan, providing more flexibility and control over future rate changes.
Why This Matters
This change is a big win for borrowers. If customer has improved credit score, reduced debts, then bank can review the loan. If the bank finds borrower’s credit profile stronger than before, it can reduce spread, which directly lowers interest rate and EMI. This also improves monetary policy transmission, meaning when the RBI cuts benchmark rates, those benefits will reach customers faster. Most importantly, it creates a level playing field — earlier, new customers often got better deals than loyal existing ones. Now, everyone has an equal chance to benefit from rate cuts and improved creditworthiness.
