While upfront payment eliminates interest costs, a home loan preserves liquidity and spreads the financial commitment over time. With the RBI raising the repo rate to 5.50 per cent in October 2026 and home loan rates ranging from approximately 7.35 per cent to 7.80 per cent per annum, the cost of borrowing deserves careful consideration. Ultimately, the decision hinges on borrowing costs, potential investment returns, income stability and the need to maintain an adequate emergency fund.
The numbers behind the decision
Consider a property priced at Rs 1 crore. A buyer choosing full payment would pay the entire amount upfront, avoiding loan interest but committing a substantial portion of their savings to a single asset.
Alternatively, in most cases today, the buyer makes a down payment of just 10 per cent (Rs 10 lakh) and the bank funds the remaining 90 per cent (Rs 90 lakh) over 20 years. At an illustrative interest rate of 7.60 per cent per annum (the middle of the current 7.35 per cent โ 7.80 per cent range), the equated monthly instalment (EMI) would be approximately Rs 73,055. Assuming the rate remains unchanged throughout the tenure, the total interest paid would be around Rs 85.3 lakh.
This means the buyer retains Rs 90 lakh initially, but takes on a significant long-term repayment obligation. The retained money must be deployed prudently for the loan strategy to deliver a financial advantage.
Why repo rate movements matter
According to Rubul Hatibaruah, Asst. Vice President, NK Realtors, the RBIโs repo rate increase highlights why homebuyers must look beyond current interest rates. Further monetary tightening could raise borrowing costs for repo-linked floating-rate loans, depending on loan terms and reset schedules.
For the Rs 90 lakh loan above, an illustrative rate increase from 7.40 per cent to 7.80 per cent would raise the EMI from approximately Rs 71,954 to Rs 74,163 over the same 20-year tenure. Existing borrowers may instead face a longer tenure or other contractual adjustments. The key consideration is affordability: could your monthly budget comfortably absorb higher repayments if interest rates rise?
Liquidity versus the cost of borrowing
“The decision to take a home loan or pay upfront hinges on whether retaining capital justifies the cost of borrowing. A loan can preserve liquidity for emergencies, business commitments and other financial goals. However, its benefits depend on how effectively the retained funds are utilised,”ย Hatibaruah said.
Buyers should compare potential investment returns after tax with the effective loan cost, factoring in investment risks, liquidity needs and applicable tax benefits. Assuming that investments will consistently outperform borrowing costs can distort the financial assessment.
Full upfront payment may be more prudent when borrowing costs exceed realistic, risk-adjusted returns. However, exhausting savings to eliminate debt can leave households financially vulnerable. The objective is to balance borrowing costs with liquidity and long-term financial security.
Make the decision based on affordability, not preference alone
Home loan offers, including promotional processing fee waivers, can make borrowing more attractive. But do these savings meaningfully change the overall cost of a home loan? Buyers must look beyond upfront offers and compare the effective borrowing cost, lender terms, repayment flexibility and prepayment conditions before committing.
Ultimately, neither full payment nor borrowing is universally superior. A home loan can support financial flexibility when repayments remain manageable and retained funds are used effectively. Full payment can reduce financial liabilities, provided sufficient savings remain for emergencies and other goals.
“As home loan advisors, our recommendation is to evaluate both scenarios through realistic calculations and stress-test loan affordability against potential interest rate increases. The real objective is not simply to minimise borrowing or avoid interest, but to purchase a home without compromising long-term financial security,” he said.
Calculations
The figures are illustrative financial calculations, not lender quotations or a guarantee of future interest rates.
1. Home loan vs. full payment: illustrative calculation
Assumptions for the comparison:
| Particulars | Full payment | Home loan |
| Property price | โน1,00,00,000 | โน1,00,00,000 |
| Down payment | โน1,00,00,000 | โน10, 00,000 (10%) |
| Loan amount (bank funding) | โน0 | โน90, 00,000 (90%) |
| Assumed annual interest rate | Not applicable | 7.60% |
| Loan tenure | Not applicable | 20 years |
| Monthly EMI | โน0 | Approximately โน73,055 |
| Total payments towards property/loan | โน1 crore | Approximately โน1.853 crore, including down payment |
| Total interest paid | โน0 | Approximately โน85.3 lakh |
| Initial savings retained, before other costs | โน0 | โน90 lakh |
| Assumes a standard monthly reducing-balance loan, 240 monthly instalments and a constant 7.60% interest rate throughout the tenure. Stamp duty, registration, insurance, processing fees, taxes and investment returns are excluded. | ||
What this calculation means: Full payment avoids interest costs, while the home loan preserves Rs 90 lakh in initial liquidity. However, the loan route costs approximately Rs 85.3 lakh in interest over 20 years if the assumed rate remains unchanged. Retaining savings is not automatically a financial advantage; it depends on the return earned on those funds, their risk and the borrowerโs liquidity needs.
2. Impact of a potential repo rate hike
For a Rs 90 lakh loan over 20 years, the following comparison shows how the EMI and total interest change at different assumed rates.
| Assumed annual rate | Monthly EMI | Total interest over 20 years |
| 7.40% | โน71,954 | โน82.7 lakh |
| 7.60% | โน73,055 | โน85.3 lakh |
| 7.80% | โน74,163 | โน88.0 lakh |
| Rounded estimates assume the interest rate stays constant for all 240 instalments. These are scenarios, not forecasts of future rates or actual lender offers. | ||
A seemingly small difference in interest rates can have a significant impact over a long repayment period. At 7.80 per cent, the EMI is approximately Rs 2,209 higher per month than at 7.40 per cent, increasing the total interest over 20 years by approximately Rs 5.3 lakh. Each 0.20 per cent step adds roughly Rs 1,100 to the monthly EMI and about Rs 2.6 lakh to the total interest.
However, a repo rate hike does not necessarily translate one-for-one into a home loan rate increase. The actual impact depends on the loanโs benchmark, spread, and reset schedule and lender terms.
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