Home / Money / Personal Finance /  Is it the right time to refinance your home loan?

Home loan refinancing means taking a fresh loan from the same lender or a new lender on more favourable terms in order to pay off the old loan or to get an additional loan amount as a top-up.

How it works: “The borrower has to submit the home loan application to another lender for the approval process for the home loan refinancing," says V. Swaminathan, CEO, Andromeda and Apnapaisa. The other lender first verifies the loan agreement details, asks for necessary documents and then gives final approval for transfer of the loan.

Let us take a look at the reasons you might want to refinance a home loan and what you need to keep in mind.

To avail a lower interest rate: “Reducing your interest rate could reduce your interest outflow, your tenure and allow for more savings," says Gaurav Mohta, chief marketing officer, HomeFirst Finance. You should only commit to refinancing early in your loan tenure since that is the time where most of your EMI payments are attributed to interest outflow. “You should only consider refinancing if you are getting a RoI (rate of interest) reduction of 3% or more. Otherwise, for a loan of 50 lakh or less, the transaction cost will be quite high and it won’t mathematically make sense. Thumb rule - break down your transaction cost in monthly instalments and see if you can breakeven in 6 months," he adds.

Switch from fixed to floating rate and vice versa: “Sometimes, when you choose a fixed rate of interest, you soon regret it as the interest rates start falling. In such a case, shifting to a floating rate of interest is the prudent move to make," says Mohta.

But in some instances, it may make sense to move to a fixed rate. “If the loan is taken during the festive season offer, the interest rates charged are the lowest, and thus it makes sense to opt for the fixed interest rates as the interest rates are surely going to increase in the near future," says Swaminathan.

To increase/ decrease the loan tenure: “By reducing the tenure amount, the borrower can become debt-free early. Reducing the loan amount can help the borrower save the loan repayment amount, calculated on a cumulative or say, compounded annual basis," says Swaminathan. You can also opt to increase your loan tenure if you want lower EMIs.

You may also want to refinance your home loan to get a top-up loan from the new lender or because you are not satisfied with the services of your existing lender.

“Before refinancing, you need to find out the total interest that will be saved on the old loan (A) and the interest payable in future on the new loan (B). A-B is the total amount that you have saved throughout the tenure with your loan," says Abhishikta Munjal, chief risk officer at IIFL Home Finance Ltd.

Remember there would be additional costs such as processing fee, document verification charges and so on.

Now could be a good time to refinance a home loan as interest rates may not go down any further.

“At the start of the pandemic, RBI lowered key rates but since last 6 times, it has sought to keep the repo rates unchanged. And there is little possibility that they will reduce further on. The prevalent low rates may provide real benefit to many borrowers when opting for refinancing," says says Santhosh Kumar, vice-chairman, ANAROCK Group.

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