Reserve Bank of India (RBI) announced a 35-basis point (bps) hike in the repo rate to 6.25 per cent on Wednesday. This is the fifth consecutive hike by the central bank and is likely to affect those who have taken home loans as their EMIs are all set to rise.

The Repo rate is the rate at which banks borrow from the RBI. This means banks will have to pay more money to the RBI, and usually, banks pass on the cost to borrowers by increasing their loan interest rates.

RBI has hiked the repo rate by 190 bps in the past three policies. The first hike was to the tune of 40 basis points in May and then followed it with 50 basis points in June. It again raised the repo rate by 50 basis points in August and then again by 50 basis points in September. Considering the recent hike of 35 basis points, the total rise comes out to 225 basis points. 

Home loan interest rates have already surged to 8.5 per cent from 6.5 per cent in May. After the fifth rate hike on Wednesday, the borrowing cost is set to go up for the people.

For example, if a borrower has taken a home loan of Rs 20 lakh on a 20-year period at a rate of interest of 8.50 per cent.

At present, he would be paying Rs 17,356 as EMI. But with 0.35 per cent increase after the repo rate hike, the new interest rate would jump to 8.85 per cent, taking the EMI amount to Rs 17,802.

The total interest amount before the hike would be Rs 21,65,551 but after the rate hike, the total interest amount would be Rs 22,72,486.

Till the last monetary policy meeting on September 30, the RBI had already raised the repo rate by 190 bps from 4 per cent to 5.9 per cent within a short period of 5 months. 

After RBI’s 50 basis points rate hike in September, several banks and non-banking housing finance companies increased their home loan rates. 

Most new borrowers, whether fixed or floating, will need to pay higher EMIs for their loans.

The impact on your home loan EMI will largely depend upon the remaining tenure of the loan. The higher the remaining tenure, the higher would be the percentage increase in your EMI.

Banks usually adjust the jump in interest rate by extending the EMI tenure so that the EMI amount remains unchanged for the borrower. 

Banks and other lenders usually keep an age limit (usually 60-65 years) for the borrower till which they allow the tenure extension. If the tenure extension goes beyond that, lenders don’t extend the tenure further.

Hence, lenders may not have the option of increasing the tenure for many borrowers and they will eventually increase the amount of monthly EMIs after this repo rate hike.

However, younger borrowers with shorter home loan tenures may not face this compulsion as lenders may still have some cushion to increase their tenure.

After the rate hike in September, many banks including SBI, PNB, ICICI Bank, Bank of Baroda, etc. hiked their loan interest rates. 

ICICI Bank announced a 50-bps increase in its external effective September 30. SBI increased its external benchmark lending rate (EBLR) and repo-linked lending rate (RLLR) by 50 basis points (bps). 

Punjab National Bank (PNB) increased the repo-linked lending rate by 50 basis points, raising it from 7.70 per cent to 8.40 per cent.

With RBI hiking repo rates, home loan borrowers could see themselves paying EMIs for up to 5 more years