Home loan refinancing: All you need to know

A home loan refinance can not only offer you a lower rate of interest but several other accompanying benefits.

Asish has a home loan running with ABC bank for two years. He is paying 8.8 per cent as floating rate interest. In recent times, the interest rates have been moving downwards, but ABC Bank has not lowered Asish’s interest rate. At this time XYZ Bank offers Asish a home loan at 8.15 per cent. A lower interest rate would help Asish lower his EMIs and save money on interest. Asish can go for a home loan refinance in this case. In basically means taking a new loan from another lender and paying off an existing mortgage.

Reasons to refinance your home loan: There are several reasons to refinance your home loan. We take a look.

1. You are getting a better rate of interest: A better interest rate is one of the main reasons to refinance your home loan. When interest rates fall, some lenders may not pass on the lower interest rates to existing borrowers. In other cases, they may lower the interest rates only after a certain lag. If another borrower is offering a home loan at a lower rate of interest, it makes sense to go for a home loan refinance. A lower interest rate would mean lower EMIs and also savings in terms of the total interest paid. Let us take an example. Suppose you have an outstanding balance of Rs 40 lakh in your home loan and a remaining payment term of 15 years. Your current interest rate is 8.8 per cent per annum. You refinance your home loan with a new lender who is offering an interest of 8.10 percent. In the first scenario, your EMI is Rs 40,096, and in the second scenario, your EMI is Rs 38,457. Also, when your interest rate is lowered, you pay Rs 29,22,390 as interest. So, you save almost Rs 3 lakh on interest as compared to the higher interest rate scenario.
2. When you want to switch from fixed to floating rate interest and vice-versa: Home loans are either fixed or floating rate. In fixed-rate home loans, the interest is set for a certain period after which they move to a floating rate. In the case of floating rate mortgages, the rates vary according to the current interest rates in the market. It may be that you are under a fixed-rate regime, and the interest rates are moving downward. In such a scenario you may want to shift to a floating rate loan. The opposite may also hold when the interest rates are going up steadily; you may want to change to a fixed-rate mortgage. When you go for a refinance loan, you can switch from fixed to floating rate and vice versa.
3. When you want to change your tenure and EMI amount: When you go for a home loan, you opt for a specific EMI. This depends on the value of the loan, the loan tenure and interest rate. However, in case you have an extra source of income, you may want to go for a higher EMI, so that you can pay off the home loan faster. In a situation when you have extra financial commitments, a lower EMI would help you manage your finances better. If you want to want to adjust the home loan repayment tenure and your EMI, it makes sense to go for a refinance loan. When you go for home loan refinance, the terms of the loan are drawn up again, and so you can opt for different repayment terms.
4. When you want better customer service: Sometimes, your existing home loan company may not be providing excellent customer service. For example, there may be a delay in issuing home loan payment records. Or your current lender may not be adopting the latest technology in their practices. In such instances, it is a wise decision to go for a home refinance.
5. When you want a top-up loan: A top-up loan is a loan that is given with a home loan, based on your home equity. A top-up loan can be used for any purpose and can come in handy when you require funds. The interest for a top-up loan is slightly higher than that of a home loan, so it is a better option to get funds than other high-cost loans like personal loans. Your existing lender may also give you a top-up loan. However, when you go for a home-refinance, you can go for a top-up loan at more favourable terms and a lower interest rate. This is because having made home loan repayments on time; you are in a better position to negotiate with the new lender.

Should you go for a home loan refinance: However, a home loan refinance is a complex process and also involves individual costs. So it is essential to consider a few things before you go for a refinance loan.

Costs involved: There are legal fees, processing fees and also a pre-payment penalty with the existing lender in case you had a fixed rate home loan. So it is essential to do a cost-benefit analysis before you choose to go for a home loan refinance. A home loan refinance should give you substantial monetary benefits in terms of a lower EMI and saving on interest.

Time of refinancing: A home loan refinance makes sense only in the early years of a home loan. If one opts for a home loan refinance in the later years of the home loan tenure when most of the interest has been repaid, home refinance does not make financial sense. For example, when 70 per cent or more of the home loan has been paid, it does not make financial sense to go for a home loan refinance.

Non-financial factors: As discussed before, lower interest rates should not be the only factor to go for a home loan refinance. You should also look for the brand name of the new lender, their reputation and customer policies. Sometimes a lender may offer lucrative interest rates but may have poor customer service. Repayment terms and conditions that the new lender offers will also be an essential factor in your decision to refinance your home loan.

Also, one needs to remember that a home loan refinance is treated as a new home loan. So you will have to go through all the procedures again. This would include a legal verification of the property.

You need to get a no-objection certificate from your existing lender who has to transfer all the relevant documents to the new lender. Further, you may not be eligible for a refinance loan if you have not been regular with loan repayments.

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