Interest rates falling, should your refinance your home loan?

The point is banks and HFCs are supposed to extend the benefits of falling interest rates to existing floating home loan customers as well, which usually do not happen and requires lot of applications/representations to the respective banks/HFCs to avail of such benefits.

Jun 14, 2015 06:06 IST India Infoline News Service

With banks reducing their base rates, home loan rates will start falling in the days ahead. While this is good news for new home loan customers, people who are already paying home loan EMIs at higher interest rates tend to feel the pinch. Banks and home loan financiers often chase such loan clients to get their loans refinanced in order to reduce available the benefits of lower interest rates and reduce EMI outgo.

The point is banks and HFCs are supposed to extend the benefits of falling interest rates to existing floating home loan customers as well, which usually do not happen and requires lot of applications/representations to the respective banks/HFCs to avail of such benefits.

Under the circumstances, does it make sense to refinance your home loan from another bank or HFC?

Refinancing of a loan means taking a new loan to pay out your current mortgage. There are many reasons homeowners go for a refinance, such as lower interest rate, option of lowering or increasing the tenure of a loan to increase or reduce EMI payments or to shift from a floating rate to fixed rate, or vice-versa.

 But loan refinancing is not always a win-win proposition. First of all, refinancing a home loan comes at a charge, which differs from bank to bank. So one must ensure that the savings one makes by opting for refinancing is higher compared with the fee and charges paid to get a loan refinanced.

Generally, it is advisable to continue with the existing loan unless there is difference of at least 0.75-1.00 per cent between the current interest rate and refinancing rate of interest. If one expects a drop in interest rates in the near future, it is advisable to refinance your high fixed rate loans. If you expect rise in interest rates, it is advisable to go for fixed rate refinancing.

Loan tenure is inversely proportional to EMIs. Higher the loan tenure, lesser the EMI, and lesser the tenure, the higher the EMI. Similarly, the total interest paid is directly proportional to the loan tenure. The longer the tenure, the higher the total interest paid. So if one has an increase in salary, but does not have a substantial amount to go for prepayment, refinancing the home loan at lesser tenure is advisable.

It is also important to see at what stage you are deciding to get your home loan refinanced. If your loan is pretty old, chances are a vast part of your EMI is going towards payment of the principal amount and a smaller amount is towards interest payment. Whereas in the case of the refinanced loan, your interest outgo will be higher initially. Hence, it might make better sense for you to stick to the old mortgage.

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