07 JULY, 2022

The Reserve Bank of India (RBI) on June 8, 2022, increased its repo rate by 50 basis points (bps). This comes after the recent hike on May 4, 2022, by 40 bps. The current repo rate now stands at 4.9 percent. What does this hike mean for bank lending rates and your home loan Equated Monthly Instalment (EMI)? Every time RBI revises its repo rate, there is a direct impact on your EMI or tenure. Here, we have explained how the current repo rate hike can affect your home loan EMI with examples.

Repo rate and its impact on your home loan

The repo rate is the rate at which the central bank of India, RBI, lends money to all banks. When RBI increases the repo rate, it becomes more expensive for banks to borrow money from it as they have to pay more interest. As a result, banks are more likely to lend money to customers at a higher interest rate.

An increase in the repo rate also leads to an increase in the "base rate", which is the minimum interest rate that banks can charge on loans. This has a knock-on effect of making all loans expensive, including home loans that can directly impact your home loan eligibility. It often leads to an increase in EMIs for home loan borrowers. 

Example explaining how the repo rate hike can affect your home loan EMIs  

Let’s understand how a repo rate hike of 0.5% by RBI can affect your home loan. Depending on your home loan eligibility, including your credit score, repayment capacity, etc., you may have gotten a specific home loan interest rate. Whether this was on the lower end or the higher end, it will be impacted by the increase in repo rate.

 

For example, say you availed a home loan for Rs 30 lakhs for a tenure of 20 years at a floating interest rate of 6.9%. Your EMI comes out to be Rs 23,080. However, with the repo rate hike of 0.5%, the interest rate on your loan will increase to 7.4%. This will take your monthly EMI at Rs 23,980, an increase of Rs 900 from your previous EMI.


Now suppose you didn’t have a strong financial profile and got a home loan at a higher interest rate, around 8.1 percent before the repo rate hike, making the monthly EMIs of Rs 25,280. However, after a 0.5% hike in repo rate, the revised interest rate will be 8.6% and the new EMI comes to around Rs 26,220. So, the total increase in EMI would be around Rs 940. 

 

What should you do?


If you are planning to apply for a home loan, you should first ensure to use a home loan EMI calculator to get a detailed idea about monthly loan repayments. Here's how it works. First, enter the loan amount, interest rate, and loan tenure into the calculator. The calculator will then give you an estimate of your monthly EMI. You can use this information to create a budget and see if you can afford the repayments. If you have an outstanding home loan, you can consider a few options to make your EMI amount more manageable such as a balance transfer, part prepayment, increasing the loan tenure, etc.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.