A Home Loan is a huge commitment that often spans 15 – 20 years. It involves a substantial amount of money on a monthly basis for a very long duration. Hence, the interest rate and corresponding loan tenure should be a matter of concern for every borrower not only while taking the loan but also during the entire tenure of repaying the loan.
Over the last few quarters, the RBI has lowered the repo rate, which has been followed by rate cuts by banks and lenders. This has resulted in lower interest rates for Home Loans. These new reduced home loan rates are in principle applicable for new borrowers and not existing ones.
In case an existing borrower wants to lower his interest burden, he can reset his interest rate with the existing Bank or can switch the loan to another Bank/NBFC. If done rightly and at the right time this can lead to substantial savings.
Basics of Refinancing (Balance Transfer):
Refinancing or balance transfer of a home loan is nothing but paying off the Principal Outstanding in an existing Home Loan by taking a new loan at a reduced rate of interest.
Key points to Consider:
- In case existing loan is on fixed rate; first thing to do will be to convert it to a floating rate. This will involve charges which would be around 2% of unpaid amount.
- The borrower should have a good track record of paying the home loan. Balance transfer is treated as a fresh home loan by the new Bank or NBFC and they will definitely do a credit and background check.
- Credit worthiness of the borrower should be intact or should have improved
For example: If the borrower was working while talking the initial loan and is now on a sabbatical, the re-payment capability will not be viewed positively
- Cost benefit analysis comparing processing fees, transfer fees, difference between the interest rate and tenure of loan
- A processing fee needs to be paid which differs from bank to bank. It could be a flat amount ranging between INR 5000 – 10,000 or 0.5 percent of the loan amount. There could also be a special offer from banks for Balance Transfer with respect to fee waivers or discounts.
- Balance transfer is most beneficial if done in the early years of the repayment cycle i.e. when the Principal Outstanding is large to gain maximum benefit. If done at a stage when only few years of the loan tenure is pending, the benefit will not be attractive.
For example:
Loan Amount (INR) – 1500000
Tenure (years) – 20
Rate of Interest – 10.50%
Revised Rate – 9%
- Balance Transfer after 60 Months i.e. 5 years: Savings in interest will be around 2.23 Lacs. Since around 15 years of repayment tenure is still remaining and in the initial years a large part of the payment includes only interest.
- If balance transfer is done after 12 years savings in interest will be only around 74 thousand.
- In case if balance transfer is done when only one year of loan tenure is remaining, interest difference will be as less as 1K and factoring in processing fees etc. it will become a loss making proposition to change banks.
Process of Refinancing:
Step 1: A detailed cost benefit analysis
Step2: Initiate the process of getting a No Objection Certificate (NOC), credit history from existing Bank, list of property documents with the Bank, and Foreclosure letter
Step 3: The new bank will carry out the requisite credit check, evaluate property documents (at this stage the new bank can also ask for NOC from the housing society), evaluate proof of income and after evaluation will issue a sanction letter with the revised rate of interest.
Step4: Once all the checks are through and the documentation is complete, the new lender disburses the Principal Outstanding to the old bank.
Step 5: The old bank will submit property documents to the new bank and will cancel postdated EMI cheques or ECS instructions.
