Between May 2022 and February 2023, the Reserve Bank of India (RBI) raised the repo rate by 250 basis points (bps). As a result, home loan interest rates have gone up from seven per cent to 9.5 per cent. As a result, borrowers are now either having to pay a higher equated monthly instalment (EMI) or extend their home loan tenure.
In such a situation, one option that borrowers have is to refinance their home loans. Refinancing essentially refers to transferring your loan to a lender who is offering you a lower rate of interest. In that case, your EMI will go down.
“One clear reason to refinance would be if you borrowed when your credit score was low or if you did not have a credit score. Lenders typically charge anywhere between 50 and 200 bps as a credit risk premium over the benchmark-linked rate. So if your credit score has improved over time, you may be able to refinance to get a lower rate of interest,” says AK Narayanan, CEO, AK Narayan Associates, a financial planning firm.
When Refinancing Makes Sense: Refinancing your loan is similar to applying for a new loan and it has all the incumbent expenses, such as processing fees, mortgage deed fee charges, legal fees, among others. So, one should make sure to account for these expenses while transferring the loan.
“Use a home loan refinance calculator to calculate how much you would save on interest when you switch. Also, factor in the penalties, fees, and charges to get a realistic estimate,” says Narayanan.
“As a rule, consumers should consider refinancing if they are aiming to gain around 50-100 bps reduction in the current loan,” says Vishal Raheja, managing director, InvestoXpert.com, a real estate consultancy firm. Otherwise, it might not make much financial sense.
Also, it is important to remember that refinancing a home loan makes the most sense during the first five years of the tenure, as that is when the interest payments are the highest. If your home loan is nearing the end of its tenure, then refinancing doesn’t make much sense.
However, it’s important to remember that lower interest rates should not be the only reason to refinance your home loan. You may decide to refinance your home loan if you are not happy with your existing lender and want a better service experience.
To refinance your home loan, you should first approach your existing lender and request to close the loan. Once you have paid all your outstanding due, the bank will give you a no-objection certificate. You would also need to collect the documents in possession with your bank. Then you can approach the new lender and finish all the formalities till your new loan is issued.
