RBI’s new credit score rules: How they can help lower your home loan interest rates

When you take a floating interest rate loan like a home loan, some banks decide the interest rate based on your credit score, along with other factors. The higher the credit score, the lower the interest rate offered. Now, as per the RBI’s new directions, after taking the loan, if your credit score improves, you can approach the bank with a request to reduce the interest rate.

In this article, we will understand what the RBI’s new directions are, when they are effective, and how they can help you reduce the interest rate on your home loan.

RBI’s new directions on the interest rate on floating-rate loans

On 29th September 2025, the RBI issued the Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025. As per the new directions, banks can reduce the spread charged for a loan category earlier than three years for customer retention, on justifiable grounds, in a non-discriminatory manner.

So, if your credit score has improved recently, your debt burden has gone down, or you have become a less risky customer, you can approach the bank for an interest rate cut on your loan. The bank will conduct a credit assessment to determine whether it has undergone a substantial change, as agreed upon in the loan contract. If it has, the bank will reduce the credit risk premium charged on the loan. It will result in the interest rate charged on the loan coming down, thereby helping you save money.

Earlier, banks could make changes in the spread once in three years. However, following the recent RBI directions, changes in the spread can be made even before the completion of three years. Therefore, banks can pass on the benefits of a cut in loan interest rates faster to their customers.

How is the loan interest rate determined?

The bank-determined interest rate consists of two components: a benchmark rate and a bank spread on it. The external benchmark rate can be the RBI’s policy repo rate, the Government of India (GOI) 3-month treasury bill yield, the GOI 6-month treasury bill yield, or any other benchmark market interest rate published by the Financial Benchmarks India Private Limited (FBIL).

The bank spread includes factors such as the bank’s margin, operational costs, credit risk (assessed through the borrower’s credit score and profile), and loan tenure, among others. It is here that the RBI’s new directions come into the picture. When the borrower’s credit score and profile improve substantially, they can request the bank to revise the bank spread on the lower side, resulting in a reduction in the interest rate on their loan.

From when are the changes effective?

The Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025, are effective from 1st October 2025. While the directions are positive for bank borrowers, they are not automatic. It means borrowers will need to take the initiative to approach the bank for a reduction in the interest rates.

How will it help existing borrowers?

Earlier, new loan borrowers got the benefit of lower interest rates based on their credit score and other factors. In the case of existing borrowers, even if their credit score improved, they had to wait for the three-year lock-in period to get over before the bank could conduct a credit assessment for a reduction in the interest rate.

The RBI directions have removed the 3-year lock-in period for the credit assessment of a borrower. Thus, if your credit score has improved meaningfully, you can approach the bank for an immediate credit assessment. During the credit assessment, if the bank determines that there is an improvement, it can reduce the interest rate on your loan with immediate effect. A lower interest rate can result in either a reduction in the EMI amount or a lower loan tenure.

How much can a borrower save?

With a lower interest rate, the borrower will save money on the interest outgo. Usually, home loans are for a longer tenure of 20 to 25 years and for larger amounts ranging between Rs. 25 lakhs and Rs. 75 lakhs. On such long tenures and high amount loans, even a small interest rate reduction of 0.25% can help a borrower save a substantial amount of money. Depending on the loan tenure and amount, a borrower can save thousands of Rupees in interest costs over the entire loan tenure.

Instead of a cut in EMI, if a borrower opts for a reduction in the loan tenure, the loan will get over earlier than scheduled. If the home loan is the only loan that the borrower has, they will become debt-free earlier than expected.

How to improve the credit score

The new RBI directions will encourage borrowers to improve their individual credit scores, enabling them to benefit from a cut in the interest rate on their loan. A borrower can take the following steps to improve their credit score.

Timely payments: Always pay your loan EMIs and credit card outstanding before or by the due date. Timely payments carry the highest weightage in calculating the credit score.

Lower credit utilisation ratio: The credit utilisation ratio (CUR) measures the percentage of an individual’s monthly income going towards loan payments. A CUR of 30% or lower contributes positively towards improving an individual’s credit score. If your CUR is higher than 30%, take steps towards bringing it down to 30% or lower.

Healthy credit mix: A healthy credit mix, comprising both secured (e.g., home loans, vehicle loans) and unsecured (e.g., personal loans, credit cards) loans, contributes towards improving an individual’s credit score. Check whether your credit mix is healthy or is tilted towards secured or unsecured loans.

One credit application at a time: Apply for one credit product (loan or credit card) with one bank at a time. Wait for the bank to provide the final decision before making the next application. Avoid submitting multiple credit applications within a short timeframe.

Credit ageing: Do you have an old, unused credit card that you are planning to close? Instead of closing it, request the bank to make it lifetime free and use it occasionally. The longer the credit ageing, the better it contributes towards improving your credit score.

Improve your credit score and benefit from lower interest rates

In the above section, we discussed various ways to improve your credit score. Work on them to improve your credit score. A lower credit score can help you request that the bank lower the interest rate on your loan. A lower interest rate can help you save on the interest outgo on your loan. It can also help you become debt-free faster.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.

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