When the base rates reduce, the home loan rate of interest gradually falls. This is great news for the new home loan seekers who can avail a home loan now at a lower rate of interest. Borrowers who have already taken a home loan at a higher rate of interest would be at a loss.
Banks would now try to grab a greater market share, by inducing new customers for taking home loans at a lower interest rate. But what about the existing customers who had taken a loan before the interest rates fell? Should they refinance their loan to avail the benefit of a falling interest rate?
Refinancing of a loan essentially means restructuring the existing loan, in terms of tenure, interest rate and type. Refinancing a loan involves varies costs such as the pre-payment penalty by the existing bank and the processing fee by the new one. Additionally, these charges differ from bank to bank. Therefore refinancing is not always considered a correct decision. Learn more about home loan refinancing here.
Before making a decision, you must check whether the savings made after opting for refinancing is higher that the costs involved in refinancing. If it isn’t, then opting for refinancing is not the correct decision.
If the refinancing interest rate is lesser than the current interest rate by 1% or more then you should ideally opt for refinancing. If you anticipate a reduction in the interest rates, you must refinance your high fixed rate loans. Similarly if you anticipate the rates to increase you must go in for a fixed rate refinancing.
The tenure and the interest rate are directly proportional to each other. The longer the tenure, the higher the total interest paid and vice versa. So if you get a salary increment, refinancing your home loan at lesser tenure is the best option.
Refinancing a loan is not always the best bet when the interest rates are low. It could work against you if the costs involved are higher than the savings made. Work the math and then make a conclusive decision.