RBI repo rate hike: Higher EMI or longer tenure? Which is cheaper for home loan borrowers?

The Reserve Bank of India’s (RBI) 25-basis-point repo rate hike to 5.50% will raise borrowing costs for floating-rate home loan borrowers, but the bigger question is how banks pass on the increase. Borrowers could either pay a higher EMI while keeping the original tenure or retain a similar EMI by extending the repayment period.

For borrowers who can afford it, taking the higher EMI is generally the cheaper option because extending the tenure can significantly increase the total interest paid over the life of the loan.

Atul Monga, CEO & Co-Founder, BASIC Home Loan, said: “The RBI’s decision to increase the repo rate by 25 basis points reflects its continued focus on containing inflation while maintaining macroeconomic stability. While this move is likely to result in a marginal increase in home loan borrowing costs, we do not expect it to significantly alter homebuyer sentiment or long-term housing demand.”

He added that borrowers should focus on disciplined debt management rather than reacting to short-term rate movements. “The smartest approach is to absorb the rate increase by opting for a higher EMI instead of extending loan tenures, as stretching the repayment schedule significantly inflates cumulative interest,” Monga said.

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Higher EMI or longer tenure?

When a floating-rate home loan becomes more expensive, borrowers typically have three choices: accept a higher EMI and keep the original tenure, keep the EMI broadly unchanged by extending the tenure, or use a combination of both.

The first option means a greater monthly outgo but allows the borrower to become debt-free at the originally scheduled date. The second may provide immediate relief to the household budget, but the loan remains outstanding for longer and attracts interest for a longer period.

Adhil Shetty, CEO, BankBazaar, said: “For home loan borrowers, this will show up as a higher EMI or a longer tenure, depending on the lender. Floating-rate loans linked to the repo rate usually reset within a few months. Many lenders extend the tenure to keep the EMI unchanged, which feels easier but costs more over time.”

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What a 25-bps hike means for your EMI

The difference becomes clearer when the numbers are calculated.

For a ₹40 lakh home loan at 7.5% for 25 years, the EMI is about ₹29,559. If the rate rises by 25 bps to 7.75%, the EMI increases to approximately ₹30,213 — an increase of ₹654 a month.

If the higher rate remains unchanged for the entire 25-year tenure, total interest paid would rise from about ₹48.68 lakh to ₹50.64 lakh, adding roughly ₹1.96 lakh to the interest burden.

For larger loans, the impact increases:

These calculations assume the loan runs for the full 25 years at the respective interest rates. Actual impact will depend on the lender’s reset mechanism, the outstanding principal and the remaining tenure.

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Why extending the tenure can cost more

Suppose a borrower does not want the EMI to rise after the rate increase. The lender may increase the repayment period instead. This can make the monthly budget easier to manage, but the borrower continues paying interest for a longer period.

For example, on a ₹50 lakh loan, an EMI increase of around ₹817 a month may appear manageable compared with the alternative of carrying the loan for additional months or years.

Shetty said borrowers should ask their lender how the rate change will be applied and consider making periodic prepayments. “Making a small prepayment each year can help limit the extra interest,” he said.

Monga also suggested using annual savings or bonuses to prepay an additional EMI and checking whether the lender offers an internal repricing option that could bring down the loan spread.

Higher EMI vs longer tenure

For a ₹50 lakh loan, the comparison can be presented this way:

What if you keep the EMI unchanged?

This is the more important calculation for your EMI vs tenure angle. If the borrower keeps paying roughly the old EMI after the rate rises, the tenure has to increase.

*Approximate, assuming the EMI is kept unchanged and the rate remains at 7.75% for the remaining loan period.

For borrowers who cannot comfortably absorb the higher EMI, however, extending the tenure may still be preferable to putting excessive pressure on their monthly cash flow. The key is to understand the long-term cost before making that choice.

Rajesh Sharma, Managing Director, Capri Loans, said the impact of higher rates would depend on how monetary tightening feeds through to credit demand. “Higher rates can gradually moderate consumption, investment and credit demand, making effective policy transmission an important consideration,” he said.

For existing home loan borrowers, therefore, the 25-bps hike is not just about an extra few hundred rupees in the monthly EMI. The more important decision is whether to pay that amount now or potentially pay substantially more in interest by keeping the EMI unchanged and extending the loan tenure.