Refinancing Your Home Loan? Here Is How To Do It Right

Consider these cases:

A. Three years after buying a home, Mr A realised that the rate of interest he is paying on his loan may be more than other banks were offering. This made him feel how naive he was at the time of buying the property. Feeling cheated, Mr A decided to go for refinancing of his loan.

B. Five years after taking a home loan for a 30-year tenure, Mr B thought the time-frame is too long. With a view to reduce it to 20, Mr B approached his bank to shift to another plan.

C. After getting a big promotion and a good salary raise, Mr C decided to increase the EMI (equated monthly installment) amount of his home loan to get rid of the burden as soon as possible. He decided to refinance his loan to increase the monthly EMI amount.

Now, these case studies tell us about the three factors ---- the interest rate of a loan, the tenure of a loan and the amount of a loan ---- affect a buyer's refinancing decision. In many scenario, shifting your home loan from one bank to another or going for a re-financing with better terms within your bank may be a good option. However, before you do so, consider these points:

Why refinancing home loan can be a good idea

Refinancing home loan can be beneficial if the new bank is offering attractive rate of interest that can bring down the total cost of loan. Applicants can switch loans to shift their debt to prevailing market rate rather than paying high interest rate. Also, if you are willing to move from floating to fixed rate of interest or vica versa, getting it refinanced can be a good idea. Your monthly EMI burden can come down, giving you significant cost savings. Applicants can also apply for top-up loan when switching lenders if the rate of interest is attractive. However, enquire about the top-up loan plan from the existing lender as well. 

Why refinancing home loan can be a bad idea

• All over again

The bank that you approach for refinancing will treat you like a new customer, despite the paper work and other formalities that you have done for the former loan. Apart from that, the new bank will also charge a loan-processing fees, as in case of a new loan. This is generally a percentage of the loan itself. In case you want to switch from one plan to another within a bank or a finance company, you will have to pay a fee.

• Those extra bucks

Before a bank agrees to refinance your loan, it will most likely do a survey to decide the price appreciation/depreciation of the property. The cost of the survey goes from the buyer's pocket.

• Fixing it alright

Remember this: on a fixed rate, the interest on you home loan remains constant throughout the loan period, irrespective of the changes in market conditions, while in a floating one, the interest can decrease or increase depending on market fluctuations.

So, while it may look like a very attractive deal when you go for a new loan on low floating rates, things may change in future. If the interest rate cycle changes soon after you shift the loan, you may end up paying more. It is advisable you shift your loan only if you are getting a good discount on a fixed rate of interest.

• Pre-pay if possible

There are only marginal gains in shifting loans, if the principle amount remains unchanged. It would be better for a buyer to use savings to reduce the loan amount before refinancing a loan. This way, while the EMI amount would be lower easing your monthly burden (after the shift), the loan amount would go down, too, cutting the interest costs. The loan-prepayment process is also smoother while shifting banks.

• Keep your eyes & ears open

These days, ones sees banks coming up with loan discount programmes and such offers quite often. Even as you keep the research and re-finance options ready, keep checking about the interest rates around banks. Wait for the discount schemes that banks might launch soon after the government makes certain announcements about the banking or real estate sector. These schemes may help you strike a good deal.

(Katya Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities.)