RBI's repo rate hike: Home loan EMIs set to go up by 2-4%

The Reserve Bank of India (RBI) has increased the repo rate by 25 bps to 6.5 per cent, which will have an immediate effect on your home loan EMIs. The key benchmark lending rate has risen significantly by 250 bps to 6.50 per cent since May last year, which touched the bottom of 4 per cent in April 2020. However, inflation is expected to moderate in the long run which should bring down your home loan instalment gradually this year. The monetary policy committee (MPC) meeting was held from February 6 to February 8.  This was the first MPC meeting after Union Finance Minister Nirmala Sitharaman presented Budget 2023 in Parliament on February 1.

"Repo rate is directly linked to loan rates offered by lenders so an increase in the repo will increase the borrowing cost and vice-versa. The rate hike of 25 bps today will make EMIs expensive by approximately 2-4 per cent. Borrowers will either have to shell out extra money to repay their loans or will have to extend the tenure," noted V Swaminathan, Executive Chairman, Andromeda Sales and Apnapaisa.com.

When banks increase their benchmark lending rates for home loans you have two options either continue with the ongoing repayment schedule with a higher EMI or switch to a long tenure with the same EMI amount.  The default option for banks in such a scenario is to increase the tenure of the loan. For example, a home loan borrower with an outstanding principal of Rs 50 lakh and tenor of 20 years at 9 per cent interest could see their tenor extend by 14 months when interest moves up to 9.25 per cent and interest income up by Rs5.87 lakh. The EMI will go up by Rs 807 to Rs 45,793 from Rs 44,986. 

However, due to a series of recent hikes, home loan interest rates have already crossed the mark of 9 per cent, which is a concerning point for many banks as the tenure of the home loan has already crossed the working age of 60 years. Given the steep rise in the tenure of loans, a few banks have opted to increase the instalment than tenure. Hence, it is advisable to keep a check on your home loan EMIs to understand how they are getting adjusted. 

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Also read: RBI Monetary Policy announcements today; repo rate likely to be hiked by 25 bps