Repo Rate Change: What It Means for Your Home Loan EMIs

When the Reserve Bank of India (RBI) announces a change in the repo rate, it doesn’t just make headlines—it directly affects your home loan EMIs. If you're a homeowner or planning to take a home loan soon, understanding this connection is crucial for your financial planning.

What Is the Repo Rate?

The repo rate is the interest rate at which the RBI lends money to commercial banks. When inflation rises or the economy needs cooling down, the RBI increases this rate. Conversely, during economic slowdowns, the RBI may reduce the rate to encourage borrowing and spending.

How Is Your Home Loan Linked to the Repo Rate?

Most home loans today, especially those taken after October 2019, are linked to an external benchmark, and the repo rate is the most commonly used one. This means your lender adjusts your home loan interest rate based on the repo rate changes announced by the RBI.

What Happens When the Repo Rate Changes?

1. If the Repo Rate Increases:

• Your bank pays more to borrow money from the RBI.

• This cost is passed on to you in the form of higher home loan interest rates.

• Higher interest means higher EMIs or a longer loan tenure if you keep the EMI the same.

2. If the Repo Rate Decreases:

• The borrowing cost for banks goes down.

• Ideally, your lender should reduce your loan’s interest rate.

• Lower interest means reduced EMIs or a shorter tenure if EMI remains constant.

A Quick Example

Suppose you have a home loan of ₹50 lakhs at an interest rate of 8%. If the repo rate increases by 0.25%, your bank may increase your rate to 8.25%. This small change could raise your EMI by a few hundred rupees or extend your loan tenure by several months—impacting your overall repayment burden.

Factors That Affect the Transmission

While repo rate changes should reflect quickly in your EMIs, that’s not always the case. Here’s why:

• Banks sometimes delay passing on the benefit (or burden).

• Your loan agreement might have a reset period (typically 3 or 6 months).

• Older loans on base rate or MCLR are not directly linked to the repo rate, so the impact is slower.

What Should You Do?

• Check your loan type: If it’s linked to the repo rate, changes will happen relatively faster.

• Track RBI announcements: A scheduled Monetary Policy review happens every two months.

• Negotiate or switch: If your bank isn’t passing the benefit, consider refinancing with a lender offering better terms.

Final Thoughts

The repo rate plays a silent but powerful role in your home loan journey. While you can’t control it, staying informed helps you make smart decisions—like refinancing at the right time or adjusting your finances for rising EMIs.

Understanding the repo rate’s effect on your EMIs gives you better control over your home loan and long-term financial health.