How to Gradually Minimise Your Principal Amount
Loan Planning
Apr 29, 2024
The Reserve Bank of India (RBI) raised the repo rate from 5.25% to 5.50% on October 7, 2026, an increase of 25 basis points. For a homebuyer, this 0.25 percentage-point increase immediately impacts your home loan. A change in the loan rate can increase your home loan EMI, extend the repayment tenure, or affect both, depending on how the interest rate on your home loan is structured.
For the calculations in this article, we will assume you are 10 years into a 30-year home loan and still have ₹30 lakh of principal left to repay over the remaining 20 years. Your current interest rate is 7.5%.
We will use the same outstanding amount, rate and remaining tenure to compare two versions of the loan, one where 7.5% remains fixed and another where the loan is floating and repo linked. In the floating interest rate example, the RBI repo rate hike increases the rate from 7.5% to 7.75% for the remaining tenure.
What is the RBI repo rate?
Banks sometimes need short-term funds to manage their daily cash requirements. They can borrow money from the RBI by providing government or other approved securities as collateral. The repo rate is the interest rate the RBI charges on this borrowing. RBI defines it as the rate at which it provides liquidity to banks against eligible securities.
The repo rate is also one of the tools the RBI uses to conduct monetary policy. It refers to the steps the RBI takes to influence interest rates, availability of credit and money in the economy. Its primary objective is to maintain price stability while keeping economic growth in mind. When the repo rate rises, borrowing from the RBI through this facility becomes more expensive for banks, which can eventually influence lending rates depending on how a loan is priced.
The latest increase is 25 basis points (bps). One basis point equals 0.01 percentage point, which makes 25 bps equal to 0.25 percentage point. The repo rate has therefore moved from 5.25% to 5.50%.
The interest rate on your home loan EMI has its own pricing structure. How this RBI repo rate hike affects your home loan EMI depends first on whether your interest rate stays fixed for an agreed period or changes with a reference rate.
While you’re here, test your knowledge with a quick crossword.
How does the RBI repo rate hike affect your home loan EMIs?
Home loans in India usually run for many years, during which interest rates in the economy can change several times. Loan contracts deal with these changes through two broad interest-rate structures: fixed interest rate and floating interest rate.
With a fixed-rate home loan, the agreed interest rate remains unchanged for the period specified in the loan agreement. In a pure fixed-rate loan, the rate can remain the same throughout the tenure.
In our illustration, if the 7.5% rate is fixed for the remaining 20 years, the latest RBI repo rate hike doesn’t change your EMI amount during the loan tenure. Some fixed-rate loans may allow a reset after a specified period, which makes the reset clause in the loan agreement relevant.
RBI defines a floating interest home loan as one where the interest rate doesn’t remain fixed throughout the loan tenure. From October 1, 2019, RBI requires the rate to be linked to an external benchmark, such as the RBI repo rate. An external benchmark is the reference rate the lender uses while pricing the loan. When that benchmark changes, the home loan interest rate can get revised on its scheduled reset date. This resulting change affects your home loan EMI amount, the number of instalments remaining, or both.
For the repo-linked version of our ₹30 lakh illustration, the existing 7.5% rate can be broken down as:
- Repo rate: 5.25%
- Lender’s spread: 2.25%
- Home-loan rate: 7.50%
The spread is the additional percentage charged by the lender over the benchmark. Since RBI’s hike by 25 bps to 5.50% and the spread remains at 2.25%, the calculation becomes:
- Repo rate: 5.50%
- Lender’s spread: 2.25%
- Revised home-loan rate: 7.75%
At the applicable reset, the floating-rate version of the loan therefore moves from 7.5% to 7.75% in this illustration. The fixed-rate version continues at 7.5% for its agreed fixed period.
These two structures give a home loan different ways of dealing with future interest-rate movements.
For the fixed-rate version of the ₹30 lakh loan, does anything change?
With ₹30 lakh still outstanding, 20 years left to repay and a fixed interest rate of 7.5%, your home loan EMI works out to about ₹24,168. Over 20 years, that means 240 monthly instalments.
₹24,168 × 240 = about ₹58 lakh repaid in total
Of this, ₹30 lakh is the principal still owed. The remaining amount of ~₹28 lakh is the interest paid over the 20-year period.
For the floating interest rate, where does the higher cost show up?
Now use the same ₹30 lakh outstanding balance and 20-year remaining tenure but apply the repo-linked floating rate of 7.75% after the reset. This calculation was done using 1 Finance Floating Interest Rate Calculator; it uses the outstanding principal, current and revised rates and remaining tenure to show this impact across different repayment structures.
| Loan calculation | At 7.50% | After reset to 7.75% |
|---|---|---|
| Outstanding loan | ₹30 lakh | ₹30 lakh |
| Remaining tenure | 20 years | 20 years |
| Approx. EMI | ₹24,168 | ₹24,628 |
| Approx. total interest | ₹28 lakh | ₹29.11 lakh |
The EMI rises by approximately ₹461 a month. This extra cost builds because the revised interest rate is applied repeatedly to the outstanding principal.
A home loan repays principal gradually over many years, which leaves a sizable balance attracting interest for a large part of the tenure. If 7.75% continued for all 20 years in this illustration, the higher monthly interest charges would add ~₹1.11 lakh to the total interest.
Will an existing borrower and a new homebuyer feel the hike differently?
Yes, because the rate change enters their loan at different stages.
For an existing floating interest rate borrower, the relevant numbers are the outstanding balance, remaining tenure, benchmark and next reset date. The revised rate applies to the loan that is still unpaid, which determines the change in EMI or tenure.
For a new homebuyer, the lender’s prevailing benchmark and applicable spread are already reflected in the rate offered when the loan is sanctioned. The effect appears in the borrowing terms available at that point rather than as a reset of an existing EMI.
The stage of the loan therefore changes how the same policy-rate increase reaches the borrower.
Does your home loan need a closer review after the RBI repo-rate hike?
The useful question after a rate hike is not simply whether your EMI will rise. You need to know where the change enters your own loan and how far it travels through the repayment schedule.
For a floating-rate loan, check the benchmark, current interest rate, lender’s spread, next reset date, outstanding principal and number of EMIs left. RBI requires lenders to communicate increases in EMI or tenure after a floating-rate reset and provide quarterly statements showing, among other things, the principal and interest recovered, EMI, number of EMIs remaining and annualised interest rate.
Three questions matter here. How much of the loan is still unpaid, whether the reset raises the EMI or extends the tenure, and how much additional interest the revised schedule can create.
A Qualified Financial Advisor can take that loan-level calculation further by reviewing your outstanding loans alongside income, existing EMIs and financial goals. That makes the advisory conversation more useful than a generic response to the repo-rate hike. You can see the impact of the RBI repo rate hike on your home loan EMI within the rest of your financial commitments.
