25 bps RBI repo rate hike could add ₹2.45 lakh to home loan interest over 25 years; here's the calculation

A 25 basis point (0.25 percentage point) increase in the RBI repo rate may appear modest, but it could materially increase the borrowing cost for home loan customers over a long tenure. For a ₹50 lakh floating-rate home loan, the increase could mean a higher monthly EMI as well as a significantly larger interest outgo over the life of the loan.

With retail inflation at 4.82% in August, above the RBI's medium-term target of 4%, a 25 bps repo rate increase cannot be ruled out at the central bank's October policy review, according to Adhil Shetty, CEO of BankBazaar.

For borrowers whose home loans are linked to the repo rate, a policy rate increase can eventually feed through to lending rates. While the impact of a single 25 bps move may not be disruptive immediately, its effect can become substantial when applied to a large outstanding balance over several years.

₹50 lakh loan could see ₹817 higher EMI

Consider a ₹50 lakh home loan at an interest rate of 7.5% with a 25-year tenure. The current EMI is about ₹36,950 a month, according to Shetty. A 25 bps increase in the lending rate would push the EMI up by roughly ₹817 a month, taking the monthly repayment to around ₹37,767, assuming the tenure remains unchanged.

That means the borrower would pay nearly ₹9,800 more a year in EMIs. Over the full 25-year tenure, the additional interest burden could amount to approximately ₹2.45 lakh.

The actual impact for individual borrowers will depend on their outstanding principal, remaining tenure, lender's reset mechanism and the extent to which the policy rate change is transmitted to their loan rate.

Borrowers may face higher EMI or longer tenure

A repo-linked home loan does not necessarily result in an immediate jump in EMI when rates change. Depending on the lender's policy, the adjustment could come through a higher EMI, a longer repayment tenure or a combination of both.

Shetty advised borrowers to check with their lenders to understand how a rate reset will affect their loans.

This is particularly important for borrowers with long remaining tenures. Even a relatively small increase in the interest rate can compound over many years, making the total cost of borrowing considerably higher.

Early action can reduce interest burden

Borrowers can take steps to limit the impact of a potential rate increase. One option is to voluntarily increase the EMI rather than allowing the additional interest to extend the loan tenure.

Another strategy is to make partial prepayments, particularly when borrowers receive annual bonuses or other surplus income. Reducing the outstanding principal earlier can lower the interest charged over the remaining tenure.

For existing borrowers, the key takeaway is that 25 bps may be a small percentage-point move, but it does not necessarily translate into a small rupee impact. Acting early through higher EMIs or periodic prepayments can help contain the long-term cost if borrowing rates move higher.