Hyderabad: The Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50 per cent, a move that could increase borrowing costs for home loan customers, particularly those with floating-rate loans.
The increase marked the first repo rate hike since February 2023. The Monetary Policy Committee took the decision unanimously during its October 5-7 meeting.
The RBI also changed its policy stance to “calibrated tightening”. The move indicated that the central bank had reduced its focus on cutting interest rates in the near term.
The repo rate refers to the interest rate at which the RBI lends money to banks. When the central bank raises the rate, banks may face higher funding costs.
Banks could pass on the higher funding costs to borrowers by revising lending rates. Floating-rate home loans could therefore become more expensive.
Consider a Rs 50 lakh home loan with a 20-year repayment period and an interest rate of 8.5 per cent. The monthly EMI would stand at around Rs 43,391.
If the bank raises the interest rate by 0.25 percentage points to 8.75 per cent, the EMI could increase to around Rs 44,191, assuming the borrower retains the same 20-year tenure.
RBI repo rate hike could increase home loan repayment burden
The example would add about Rs 800 to the monthly EMI. Over the full 20-year period, the additional repayment could reach around Rs 1.9 lakh.
However, the RBI repo rate hike does not automatically increase a home loan EMI the next day. The actual impact depends on the lender’s decision and the terms of the loan.
Some banks may increase the EMI while keeping the repayment period unchanged. Others may keep the EMI unchanged and extend the loan tenure.
In some cases, lenders may change both the EMI and the repayment period. The impact will depend on the loan type, applicable interest rate and remaining tenure.
Home loan borrowers should first check whether their loans carry floating or fixed interest rates. Those with floating-rate loans should contact their banks to understand how the lender plans to respond to the rate increase.
Borrowers should also ask whether the bank will increase the EMI, extend the loan tenure or make changes to both. This information can help them adjust their monthly financial plans.
The RBI repo rate hike will have a greater impact on borrowers whose loan interest rates move in line with changes in the benchmark.