Refinancing can be an effective option for home loan borrowers who are struggling with high EMIs and a longer tenure due to the rise in repo rate. Refinancing means transferring your existing home loan to another lender who offers a lower interest rate. Adhil Shetty of BankBazaar.com tells BT how refinancing can be used to reduce the cost of the loan and thereby, bring down your EMI and tenure.
BT: Is it a good time to refinance your home loan?
Adhil Shetty: The loan interest rates have gone up by 2.5 per cent in the last one year, and almost the entire hike has been transmitted to borrowers. So, borrowers who took a loan at 7 per cent in 2020 are now repaying it at 9.5 per cent. However, over the last one year, the spreads on the loans have also fallen. Data shows that the lowest spreads on home loans stood at 1.95 in March 2023, steadily falling from the nearly 3.50 prevalent in March 2020.
This means that you may be able to refinance your ongoing loan at much lower rates. Generally, a 50 bps reduction in interest rates makes a good case to refinance. Right now, there is a chance that refinancing may help you repay your loan at almost 1per cent lower than your current rate. So, if your interest rate is higher than the average rates for new loans in the market, you should consider refinancing your loan.
Also Read– ED Files Case Against BBC For Foreign Exchange Violations
BT: What points one should keep in mind while refinancing?
Adhil Shetty: It’s important to consider the costs associated with refinancing, such as application fees, documentation charges, and other closing costs. These costs can add up and may offset the savings you would get from a lower interest rate.
Additionally, different lenders may have different eligibility requirements for refinancing in terms of credit score, income, etc. You’ll need to meet these requirements to qualify for a new loan with a lower interest rate.
Overall, if interest rates on refinancing your existing loan are 50-100 bps lower, refinancing may be a good option to consider. However, it’s important to carefully weigh the potential savings against the costs and eligibility requirements before making a decision.
Read More:-Are fixed maturity plans good for your retirement planning?
BT: What are the fine prints? Should one consider refinancing only at the beginning of the loan tenure and not towards the end?
Adhil Shetty: Refinancing early in your loan tenor—typically in the first half—makes more sense. This is when your EMIs focus on interest payments. Therefore, a lower rate will lead to big savings. Also, home loans linked to older benchmarks such as MCLR, Base Rate, or Prime Lending Rate may be costlier compared to loans linked to the repo rate.
Read More:- Gold and silver rates rise marginally. Check latest prices in your city
You may want to consider refinancing in this case, even if you are more than halfway through your loan. Before you take a call, do an actual back-of-the-envelope calculation to figure your refinance costs. When the projected savings from refinancing exceed the costs, you should consider refinancing.
