Home loan refinancing, also known as a home loan balance transfer, is a popular facility that most lenders offer these days. Home loan refinancing refers to the process of transferring one’s home loan from one’s current lender to another that offers better loan terms and conditions. Per recent RBI guidelines, individual borrowers who have availed of a home loan at floating interest rates can transfer their home loan to another lender without paying any penalty or fee. Borrowers on fixed interest rates must, however, still pay a penalty. In most cases, lenders charge this prepayment penalty as a percentage of the pending loan amount
Further, when borrowers opt for a home loan balance transfer, the new lender treats their home loan refinancing application as a new home loan application and therefore, charges a home loan refinancing fee. This home loan refinancing fee is also charged as a percentage of the total loan amount that the borrowers wants to avail of and often turns out to be a significant amount. Home loan refinancing can prove useful, however only when opted for at the right time and after taking into consideration the various fees and penalties involved. In this article, we look at when home loan refinancing is a good option and when borrowers should go for it.
Home Loan Refinancing: Here’s When it Can Prove to Be a Good Move for You
1. Make the Switch if You Are Being Offered a Better/Lower Home Loan Interest Rate
Most people opt for home loan refinancing because there is another lender willing to offer them a much lower interest rate. A lower interest rate automatically translates into lower EMIs and a lower loan tenor, both of which effectively reduce the cost of borrowing the loan and make loan repayment easy. Further, these days, most home loans come linked to an external benchmark, such as the Repo Rate. Thus, when the market conditions change, so do the floating home loan interest rates. If your home loan is linked to the Repo Rate, an increase in the Repo Rate should cause your home loans to become expensive and a decrease in the Repo Rate must make loans cheaper. Unfortunately, while most lenders are quick to pass rate hikes to borrowers, they do not pass the rate cuts when the RBI decreases the Repo Rate.
If your lender is doing the same, you can benefit from home loan refinancing. However, do keep in mind that if you wish to benefit from a lower home loan interest rate, you must opt for this facility during the early years of your home loan tenure when the interest component of the loan is still quite high. Further, there must at least be a 25bps difference in your current and new interest rate for home loan refinancing to make sense and help you build any considerable savings.
2. Opt for Home Loan Refinancing If You Wish to Change Your Interest Rate Regime or the Loan Tenor
Fixed interest rate loans are loans in which the home loan EMIs remain the same through the tenor of the loan. On the other hand, in the case of floating interest rate loans, the EMIs vary based on external market conditions. Fixed interest rates make sense when the borrower knows that the home loan interest rates will go up in the future or when they do not want to deal with EMI fluctuations as it makes loan planning difficult. Floating interest rates are cheaper than fixed interest rate home loans. Borrowers who want to switch from one housing loan interest rate regime to another can do so while opting for home loan refinancing. Similarly, if a borrower is finding it difficult to afford their EMIs, they can opt for a longer home loan tenor while going for home loan refinancing. Conversely, if they feel that they can afford higher EMIs and want to become debt-free as quickly as possible, they can choose to shorten their loan tenor.
3. Go for Home Loan Refinancing If You Wish to Avail of an Additional Loan
Many borrowers also opt for home loan refinancing when they wish to explore the opportunity of being able to avail of an additional loan. These loans are known as top-up loans and come with zero end-use restrictions. Borrowers can use the money availed of to meet all kinds of personal and professional needs. Further, the interest rate on these loans is quite low — lenders usually charge an interest rate slightly higher than the interest rate they charge on the home loan. The tenor is also long, which makes the process of loan repayment easy. So, if you need a top-up loan, you can go for home loan refinancing. However, keep in mind that one should avail of a top-up loan only if they can afford to pay the EMIs comfortably. Otherwise, they should refrain from adding more burden on them.
4. Choose Home Loan Refinancing If You are Tired of Your Lender’s Sub-Standard Service
There is no dearth of lenders in the market these days. So, if you are tired of your current lender’s sub-standard service, you can opt for home loan refinancing and change lenders. However, be cautious, do thorough research and choose a lender you can implicitly trust for you won’t get the chance to change lenders again and again. Look for someone who has been in the market for long enough and has a good reputation.
Home loan refinancing is a highly beneficial facility, however only when opted for at the right time. A home loan refinancing calculator can help you understand the ideal time for opting to go for home loan refinancing and help you make right decisions. So, use this calculator or take the help of an expert in deciding if home loan refinancing would indeed be the right choice for you. Also, keep all the points mentioned in this article in your mind as they will help you make a smart choice.