RBI repo rate hike: How will the 25 bps increase affect your home-loan EMI? Experts explain

The Reserve Bank of India (RBI) has raised the repo rate by 25 basis points to 5.50%, marking the first increase since February 2023. For home-loan borrowers, the rate hike could translate into a higher EMI or a longer repayment tenure, depending on the lender and the loan’s reset mechanism.

The impact will be quicker for borrowers with floating-rate home loans linked to external benchmarks such as the repo rate. Existing borrowers should check their loan’s benchmark and reset frequency to understand when the rate hike could affect their repayments, said Santosh Agarwal, CEO, Paisabazaar.

How much could your home-loan EMI rise?

The impact of the 25-basis-point hike will depend on the outstanding loan amount, remaining tenure and the interest rate applicable to the borrower.

For illustration, at an interest rate of 7.5% over a 25-year tenure, the monthly EMI could rise by about ₹490 on a ₹30 lakh loan, ₹654 on a ₹40 lakh loan and ₹817 on a ₹50 lakh loan once the increase is passed on, said Adhil Shetty, CEO, BankBazaar.

The actual impact will vary depending on the borrower’s loan terms and the lender’s reset mechanism.

Shetty said the effect on borrowers would be gradual. The latest increase is one-fifth of the 125 basis points of rate cuts delivered earlier, meaning much of the relief from those earlier cuts remains in place.

Your EMI may rise or your loan tenure may stretch

A rate hike does not necessarily mean that every borrower will immediately see a higher EMI. Lenders may also extend the repayment tenure while keeping the EMI unchanged.

“Many lenders extend the tenure to keep the EMI unchanged, which feels easier but costs more over time,” Shetty said.

Agarwal said existing home-loan borrowers should check with their lender whether the increase will be reflected through a higher EMI or a longer tenure and evaluate which option works better for their cash flows.

For borrowers whose tenure is extended, the monthly outgo may remain stable, but the longer repayment period can increase the overall interest cost.

What should existing home-loan borrowers do?

Borrowers should first check the benchmark against which their loan is linked and the frequency at which the interest rate resets.

The transmission of the rate hike is expected to be quickest for home loans linked to the repo rate, Agarwal said. The impact on other floating-rate loans will depend on their respective benchmarks and reset cycles.

Shetty said borrowers should ask their lender how the rate change will be applied. Making a small prepayment each year could also help reduce the additional interest burden.

What should new homebuyers consider?

For prospective homebuyers, the higher repo rate means new loans linked to external benchmarks could become more expensive.

However, Agarwal said buyers should not compare loans only on the headline interest rate. They should also look at the benchmark, the lender’s spread over that benchmark and other charges.

Homebuyers who are financially ready should not defer a purchase solely because of a rate hike, she said. Home loans are long-term commitments during which interest rates can go through multiple cycles of increases and decreases.

Borrowers should therefore assess their long-term repayment capacity and maintain sufficient headroom for potential changes in their EMI, rather than trying to time the interest-rate cycle, Agarwal said.

For existing borrowers, the immediate priority is to understand how their lender will transmit the 25 bps hike and whether the adjustment will come through a higher EMI, a longer tenure or both.