It has hardly been a good season for home loan seekers. And it just got worse.

On Tuesday, the Reserve Bank hiked the cash reserve ratio (CRR) of commercial banks — the percentage of total deposits banks have to keep with the apex bank — by 50 basis points for the second time in two months.

While this means less funds available for loans, another fallout is increased lending rates as banks try to make up for the loss of interest income they could have earned from the reverse repo rate. It is the rate the RBI pays banks when it borrows from them over the short term to soak up funds that would have otherwise chased goods in the market and pushed up prices.

Once banks increase lending rates, housing finance institutions like LIC Housing Finance, GIC Housing Finance and others are bound to follow suit. HDFC said it would increase the rates by 50 basis points by February-end or the first week of March.

While ICICI Bank has already raised its floating rate to 10.5 per cent, public sector banks had stopped short of increasing their rates after finance minister P. Chidambaram asked them not to do so.

But now that the RBI has hiked the cash reserve ratio, several banks have raised their benchmark prime lending rate (BPLR) upwards. Since a bank’s retail lending rates are linked to its BPLR, any increase in the prime lending rate will lead to a simultaneous increase in home loan and other personal loan rates.

On Wednesday, Bank of India, UBI and Bank of Baroda raised their PLR by 50 basis points, but spared home loan rates. But no one knows how long the benevolence would last.

Punjab National Bank has also raised its PLR by 50 basis points and its chairman, S.C. Gupta, said the bank would raise its home loan rates.

The floating rate for home loans, above 9.5 per cent for many banks now, is likely to cross the double-digit mark in March this year.

The fixed rate for home loans is already more than 10 per cent.

Moreover, almost every bank, except ICICI Bank and HDFC which are charging 11 per cent and more under fixed rate loans, is now offering fixed rate home loans only with a rate reset clause every two to three years.

Borrowers who opt for floating rates can continue to pay the same equated monthly instalment (at which the loan was initially taken) despite a change in interest rates. Instead of increasing or decreasing the EMI, banks allow home loan borrowers to extend or shorten their repayment period as and when interest rates go up or down.

But this has its own peril. If you choose to extend your loan tenure instead of increasing the EMI, your total interest outgo over the entire repayment period becomes more than if you had chosen to pay a higher EMI (see chart).

However, there are chances that in case of floating rates, the increases in interest rate are balanced out by decreases over the tenure of the loan repayment. So it is better to pay a higher EMI when the rate goes up and a lower EMI when the rate goes down.

An increase in interest rates also affects borrowers in another way — by reducing their loan eligibility.

The loan eligibility of a borrower depends on his or her capability to repay the loan and this is judged by the gross monthly income of the loan seeker. Banks generally consider 40 to 45 per cent of gross monthly income (without any other loan liability) less than or equal to Rs 30,000 as the repayment capacity. For incomes between Rs 30,000 and Rs 60,000, it is 50 per cent.

Your repayment capacity remaining the same, the loan eligibility comes down with every rise in EMI following an increase in interest rate.

Banks and housing finance institutions also consider the age of the borrower. For example, if you are below 40, you will be eligible for a higher quantum of loan than a person who is above 40, though he might earn as much as you do every month.