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What is the impact of repo rate on home loan EMI?
The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Any change in the repo rate directly impacts home loan interest rates and, consequently, the borrower’s monthly EMI for loans linked to external benchmarks such as the Repo Linked Lending Rate (RLLR).
How Repo Rate Affects Your Home Loan
- When the RBI increases the repo rate, the borrowing cost for banks rises
- Banks pass on this increased cost to borrowers by raising lending rates on RLLR-linked loans
- This results in a higher home loan interest rate, leading to increased EMIs or an extended loan tenure
- Conversely, when the repo rate decreases, home loan interest rates generally fall, reducing EMIs
Example
If a borrower has a ₹50 lakh home loan for 20 years at an interest rate of 8.5%, and the repo rate increases by 0.50%, the effective interest rate may rise to 9%.
In such a case:
- EMI at 8.5%: Approximately ₹43,391
- EMI at 9%: Approximately ₹44,986
- Increase in EMI: Approximately ₹1,595 per month
Impact Based on Loan Type
- RLLR-Linked (Floating Rate) Loans: Directly and immediately affected by repo rate changes
- MCLR-Linked Loans: Indirectly affected, with rate resets occurring periodically (such as every 3, 6, or 12 months)
- Fixed-Rate Loans: Generally unaffected by repo rate changes during the fixed-rate tenure
How Lenders Handle Rate Hikes
- Increasing the EMI amount
- Extending the loan tenure while keeping EMI unchanged
- Using a combination of higher EMI and longer tenure
The repo rate plays a central role in India’s home loan market. For floating-rate borrowers, monitoring RBI Monetary Policy Committee (MPC) decisions is important, as repo rate changes directly influence monthly repayments and the overall cost of borrowing.
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