SYNOPSIS

Refinancing your Home Loan makes sense when the new lender –

offers a lower rate of interest
offers a higher loan amount
permits switch from fixed to floating/adjustable interest rate
permits reduction in loan tenure
permits reduction in EMI
offers better terms and service

Don’t refinance if –

costs don’t justify it
you are nearly through with your loan repayment

In life, we always look forward to progressive options - a better home, better car, better job etc. Life would stagnate if we did not look at bettering what we are or what we have.

Optimising your home loan

As with everything else in life, it is natural that you are always on the lookout for an efficient home loan option than the one you have on hand. Even if you have already taken a home loan, it is only natural that you keep yourself attuned to the recentdevelopments and industry trends. The moment you come across a better option, youwill want better terms on your loan. But is it possible to do so or are you stuck with the existing loan for its tenure?

Fortunately, you have the option of home loan refinance. Refinance is transferring your outstanding loan balances to a new lender. Clearly, the new loan should be available at better terms than the existing one.

How is home loan refinance done?

The simplest way of refinancing is to get your new lender to settle the dues with your existing lender and take over the outstanding loan amount. Once you have decided on a lender who offers better terms and conditions, you may complete the documentation and other formalities upon which they would pay off the loan to the old lender and takeover the outstanding loan amount. You would then start paying EMIs to the new lender.

When should you opt for home loan refinance?

There are six key situations when home loan refinance should be considered:

1. When you get a lower rate of interest:

You wouldn’t want to pay a higher interest rate if you have the option of moving to a lower rate.

2. When you want to switch from fixed rate to floating or adjustable rate of interest

After you have opted for a fixed rate loan, it may so happen that interest rates start declining. In such a case, you will want to switch over to a floating rate loan to save on interest cost. If your existing lender does not permit you to avail of the floating rate option, you can refinance the loan by switching over to another lender.

3. When you want to reduce the home loan tenure:

Initially, you may have opted for a long tenure; however, if your financial position has changed for the better, you may want to reduce the tenure of the loan.

4. When you want to reduce the EMI amount

Due to a change in circumstances, you may want to lower your monthly commitments and hence look for lower rate and/ora longer tenure.

5. When you want to avail more favourable terms or better service on your home loan

After taking disbursement of the loan, you may find that the lender’s service standards are below par, or you did not get the best deal. In such cases, you can consider switching over to another lender.

6. When you want to borrow more

After taking a loan, your funding needs may have increased because of changes in the design or specifications of the house. In this case, refinance could help you avail additional funds by way of a bigger loan.

Important Factors to Consider Before Opting for Home Loan Refinance

Refinancing a home loan should not be a casual or impulsive decision. It has to be carefully thought through and all relevant factors ought to be considered before actually opting for refinance. Here are some key factors that may influence your decision:

1. Financial factors

Refinancing involves costs. Legal fees, processing fees, incidental charges with the new lender, prepayment charges with the existing lender (if you have taken a fixed rate home loan), etc. are some of the costs to be considered. You would do well to make a thorough cost-benefit analysis before taking the leap. The decision is not just about a lower rate of interest. Refinancing should mean a substantial net saving by the time the loan is repaid in full.

2. Non-financial factors

Interest rate should not be the only factor that influences your decision to refinance. You should also look for intangibles such as brand name, reputation, customer friendly policies, service aspect, safety of documents, etc. Repayment terms and conditions specified by the new lender would also play a role in your decision. Another factor you need to consider is the timing of the refinance – at which stage of your loan repayment are you going for refinance and what is the principal outstanding amount? It may not make much sense to refinance a loan that has been repaid to a large extent (say 70% or more).

Consider the example of Mr. Mehta. He has taken a home loan for Rs.25 lakh with a term of 20 years from ABC Ltd. The interest rate is floating at 10%. Now, after 3 years of taking the loan, he gets an offer of 9.00% floating interest rate from XYZ Ltd if he refinances his loan for the remaining term. He now has to decide whether to refinance home loanwith XYZ or continue unchanged with ABC.

Mr. Mehta’s present loan with ABC Ltd.

Description	Value	Remark
Original loan amount	Rs. 25 lakh	-
Tenure	20 years	-
Floating interest rate	10% p.a.	-
EMI	Rs. 24,216	-

Refinance offer received from XYZ Ltd after 3 years of repayment of home loan

Description	Value	Remark
Original loan amount	Rs. 23.69 lakh	EMI already paid for 3 years
Tenure	17 years	-
Floating interest rate	9.00%	-
EMI	Rs. 22,716	-

To refinance home loan or continue?

Description	Value	Remark
Total amount likely to be paid to ABC if he continues the loan (a)	Rs. 49.21 lakh	For the remaining tenure of 17 years
Total amount likely to be paid to XYZ if he refinances the loan (b)	Rs. 46.34 lakh	For the same period of 17 years
Savings (c=b-a)	Rs. 2.87 lakh	-
(Less) processing fees to XYZ (d)	Rs. 11,846	0.5% of the loan amount Rs.23.69 lakh
Net savings due to refinance (c-d)	Rs. 2.75 lakh	-

It is evident that Mr. Mehta saves Rs. 2.75 lakh if he refinances the loan with XYZ Ltd rather than continuing with ABC Ltd. This saving has been conservatively estimated by assuming that the reduced rate of interest will be limited to 9% p.a. If the interest rates decline further, the savings will be higher.

To conclude, refinance is a tool which allows home loan customers to smartly manage changes in circumstances to their advantage. Timely use of this tool will help you reduce the cost of your home loan.