RBI Repo Rate Hike: How A 25-Bps Rise Could Add Rs 2.4 Lakh Interest On Rs 20L–Rs 50L Home Loans At 7.50%?

The Reserve Bank of India (RBI) has hiked policy repo rate by 25 basis points to 5.5% on October 7, the first hike since February 2023. The reason behind the hike is rising crude oil prices, inflationary pressures, energy crisis, elevated treasury yields and geopolitical crisis due to West Asia war. However, the rate hike also comes as shocker for home loan borrowers as their EMIs are directly or indirectly linked to policy repo rate. RBI has also changed its monetary policy stance to calibrated tightening. Unlike fixed home loan rates, the floating rates are decided by banks based on policy repo rate which is the external benchmark. A rate hike also comes as a spoilsport ahead of festive season.

How RBI Rate Hike Will Increase Home Loan EMIs?

"For lenders, including fintechs and NBFCs, the immediate impact will be a modest rise in the cost of funds. Borrowers with repo-linked loans may see changes in their EMIs or loan tenures, while deposit rates could also rise as banks adjust to the new rate environment. The focus for lenders will be on managing costs while keeping lending rates competitive and ensuring that consumers and small businesses continue to have access to credit," said Puja Abhishek Singh, CEO, Manipal Fintech.

Why repo rate matter for home loans? The repo rate indirectly affects interest rates on home loans since it is the cost at which banks borrow from the Reserve Bank of India (RBI). When the repo rate is increased, banks may adjust lending rates to align with the revised borrowing costs. This can result in changes to home loan interest rates or EMIs, particularly for borrowers with floating-rate loans, as per PNB Housing Finance.

Let's take an example of Rs 20 lakh, Rs 30 lakh and Rs 50 lakh home loans for a tenure of 25 years. Currently, the minimum home loan rate is 7.25%, which is offered by largest lenders like SBI.

The 7.25% is a mixture of 5.25% policy repo rate + spread of 2%. While the 7.5% rate includes 5.5% new policy repo rate + 2% spread assuming that banks do not change it. The home loan rates formula is --- repo rate + spread = interest rate. While policy repo rate is an external benchmark, the spread is decided by banks and it varies accordingly. The term "external benchmark" simply means that banks cannot charge lending rates below it.

The formula for calculating EMIs are --- EMI = P × r × (1+r)ⁿ / [(1+r)ⁿ - 1]

P stands for loan principal amount.
R stands for monthly interest rate.
N stands for number of monthly installments.

The 7.25% interest rate per annum will become 0.60417% rate per month (7.25/12 months).

If banks are to hike lending rates by 25 basis points, following the policy repo rate hike, 7.25% will become 7.50%.

The 7.50% rate per annum will become 0.625% per month (7.5/12 months).

The number of monthly instalments will become 300 months which translates to 25 years.

Rs 20 Lakh Home Loans EMI

Appying the EMI formula:

At 7.25% rate: EMI per month is Rs 14,456, while while total repayment is at Rs 43.37 lakh including interests up to Rs 23.37 and Rs 20 lakh principal amount.

At 7.50%, EMI will rise to Rs 14,780 per month, a hike of Rs 324 per month and Rs 3,884 per annum. For the 25-years tenure, due to rate hike, additional Rs 97,106 interest is added.

Rs 30 Lakh Home Loans EMI

At 7.25% rate: EMIs on Rs 30 lakh home loans stood at Rs 22,170 per month. This takes the total repayment to Rs 66.51 lakh among which Rs 36.51 lakh are simply interest rates.

At 7.50% rate: EMIs will come around Rs 22,170 per month, a hike of Rs 486 from old EMI. Annually, EMIs will rise by Rs 5,826 and by Rs 1.46 lakh for the overall 25 years. At 7.50% rate, the total repayment would come around Rs 66.51 lakh which includes Rs 36.51 lakh of interests.

Rs 50 Lakh Home Loans EMI

7.25% Interest Rate: At this rate, EMI comes at Rs 36,140 per month on home loans of Rs 50 lakh. The total repayment stands at Rs 1.084 crore which includes Rs 58.42 lakh as interest rates.

But after 25-basis points hike, if home loan rates rise to 7.50%, then the monthly EMI will be Rs 36,950, a hike of Rs 809. Annually, EMIs hike by Rs 9,707 but for the total 25 years, EMIs will rise by Rs 2.43 lakh.

Loan	EMI @ 7.25%	EMI @ 7.50%	Monthly rise	Annual rise	Extra interest over 25 yrs
₹20 lakh	₹14,456	₹14,780	₹324	₹3,884	₹0.97 lakh
₹30 lakh	₹21,684	₹22,170	₹486	₹5,826	₹1.46 lakh
₹50 lakh	₹36,140	₹36,950	₹809	₹9,707	₹2.43 lakh

However, Rohit Arora, CEO & Co-founder, Biz2Credit and Biz2X believes that for borrowers, the rate hike impact is real but not dramatic. Anyone on a repo-linked floating-rate loan will see the increase come through and businesses relying on working-capital credit will feel it first. But a quarter-point is not going to stop people from borrowing.

But the expert warns that if the rate hike cycle extends to December policy, the shock will be severe. Arora said, credit demand in India is strong, and that's not changing because of one move. What I would watch is what comes next. One hike is manageable. If it turns into a cycle, with another in December, that's when businesses need to start rethinking their costs and cash flow. For lenders, this is a moment to price risk properly, borrower by borrower, instead of raising rates across the board. The good borrowers shouldn't pay for the weak ones.

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