Falling Home Loan Interest Rates: Should You Refinance Your Loan or Not?

The second COVID wave has hit middle-class families in a big way. The moratorium on EMI payments that RBI had announced last year is also nowhere in sight this year. Home loan EMI is a big item in a family’s monthly outflow, and people are increasingly looking at ways to cut down on this cost. With a barrage of offers on new home loans, this article explores the finer aspects of home loan refinancing and whether it makes sense for you.

The home loan segment forms a big part of the overall retail loan segment. Banks see home loans as a safe option due to low default rates and proper collateral in the form of the house. The pandemic has seen the growth in this space dying down. Also, a low-interest-rate environment means that the home loan rates in India right now are at a 15-year low.

In this context, top lenders like Kotak, SBI, and HDFC have slashed their home loan rates in the past few months. In March this year, Kotak offered a limited-time offer of home loans of 6.65%. SBI also reduced rates to 6.70% plus a limited time offer of 100% waiver on processing fee. HDFC has also reduced its rates to 6.75%

On September 4, 2019, RBI released a Circular to banks asking them to link new floating rate loans to an external benchmark (e.g. RBI Policy Repo rate or the 3/6 months GOI Treasury bill yield). The new external benchmarks are relatively much more transparent and predictable and have a quicker impact in reducing your home loan rates, as and when RBI announces a cut in repo rates. However, for existing loans (linked to MCLR/Base Rate/BPLR), RBI has allowed banks to continue them as it is. The only exception stated are floating-rate loans without pre-payment charges.

As a home loan borrower, the above means that if you have an existing loan based on one of the old benchmarks, your bank will not by itself move you to the new benchmark. And that is why you need to get off your couch and do some math to find out whether it makes sense to shift to a new lender with better benchmarks and rates.

Refinancing a loan is similar to getting a new loan. When you apply for a loan refinancing, the new lender will ask for the previous loan details, repayment schedule, KYC etc. It may also carry out the necessary due diligence on its part in the form of property verification etc. Once the loan is approved, it will release a cheque towards the principal outstanding on your existing loan directly to your old lender. As a result, your loan in the existing lender’s books is closed and reflected in your new lender’s books. Your new loan will be as per the new lender’s terms and conditions.

Refinancing can help you reduce your overall outflow in terms of interest cost over the tenure of the loan. Let us understand it with the help of an example:

Particulars	Existing Loan	New Loan	Change
Principal Outstanding	INR 70 lacs	INR 70 lacs	NIL
Tenure	17 years	17 years	NIL
Interest Rate	8%	6.75%	1.25%
EMI	INR 62,878	INR 57,773	5,105

Total Savings in Cash Outflow due to refinancing: INR 10.41 lacs

Takeaway: This scenario shows a realistic picture whereby there is a considerable interest rate differential between an existing and new loans at 1.25%. A consequent cash saving of INR 10.41 lacs makes the refinancing decision a no-brainer choice.

Particulars	Existing Loan	New Loan	Change
Principal Outstanding	INR 70 lacs	INR 70 lacs	NIL
Tenure	17 years	17 years	NIL
Interest Rate	7%	6.75%	0.25%
EMI	INR 58,776	INR 57,773	INR 1,003

Total Savings in Cash Outflow due to refinancing: INR 2.04 lacs

Takeaway: This scenario shows that even a tiny 25-basis points interest rate differential can create a net cash saving amounting to INR 2.04 lacs. However, consider processing charges and other costs and also your time and effort involved before taking a decision.

Particulars	Existing Loan	New Loan	Change
Principal Outstanding	INR 70 lacs	INR 70 lacs	NIL
Tenure	17 years	15 years	2 years
Interest Rate	8%	6.75%	1.25%
EMI	INR 62,878	INR 61,944	INR 934

Total Savings in Cash Outflow due to refinancing: INR 16.77 lacs

Takeaway: This scenario shows that if you are in a sound financial position and can afford to continue paying almost the same EMI, you can expect refinancing to provide you considerable savings in overall cash flow amounting to INR 16.77 lacs. This again becomes a no-brainer choice to refinance the loan.

(Source: HDFC’s Online Home Balance Transfer Calculator)

If you are on the old base rate/MCLR based benchmark and there are 5+ years left on your loan, don’t think any further. Speak to your existing lender to move you to the new benchmark. If that is not possible, explore your options in the market. Check the overall savings in terms of the cash outflow across the tenure of the loan. You can go for it as a rule of thumb if the gap is 50 basis points or more and the balance loan tenure is 5+ years. However, better to do the precise math before taking any decision.