When interest rates fall as they have done recently, most homeowners look to refinance their existing loans. While refinancing can help you cut down loan costs and repay the loan faster, it's not always the right choice. Refinancing, without considering all the costs involved could offset the savings you get from refinancing.
What is a home loan refinance and how does it work?
A home loan refinance is the process of transferring an existing home loan from one lender to another. The process is quite simple. The borrower sends a request for home loan refinance to the new lender. The new lender settles your outstanding dues to your current lender. You then continue paying the loan EMIs to the new lender, who offers you better terms and conditions.
Knowing when (and when NOT) to refinance your home loan is a must.
When is it a good idea to refinance your home loan?
When there is a reduction in interest rates
This is the main reason why most home loan borrowers shift their existing loans from one lender to another. For instance, if you find another lender who offers reduced interest rates, it makes sense to move your loan to the other lender to minimise the cost of interest and consequently, the EMI.
Most home loans are floating-rate loans. However, not all lenders reduce the interest rate of existing loans when the general interest rates fall. As a result, you may find that other lenders offer you a better deal for your existing home loan. In such cases, it's highly recommended that you opt for home loan refinance to reduce the overall loan cost.
When you want to switch from a fixed-rate home loan to a floating-rate home loan and vice versa
The interest rates of home loans can either be floating or fixed. In fixed-rate home loans, the interest remains the same for the entire tenure. Whereas in floating-rate home loans, the interest rate varies based on the fluctuations in the general economy.
Home loan borrowers can opt for refinancing in the following scenarios:
If you are stuck in a high floating-rate loan, while the prevailing fixed interest rates are low
If you are stuck in a high fixed-rate loan, while the current interest rates in a floating-rate home loan are low
In both these scenarios, a borrower can go for home loan refinance to see a reduction in overall interest rates and the EMI.
When you want to borrow more
Most lenders offer home loan refinancer the option to top-up their existing loan. For instance, consider the case of Manish who has taken a loan of Rs. Forty lakhs to buy an apartment. After paying the EMI for five years, the outstanding has come down to Rs. 30 lakhs. In the meantime, the value of his apartment has appreciated to Rs. 80 lakhs.
In this case, Manish can get a top-up loan of up to Rs.50 lakhs, besides his existing home loan of Rs. 30 lakhs, while shifting his home loan to another lender.
Smart Tip: Opt for home loan refinancing only if another lender offers you reduced interest rate compared to your current lender. If no, you can opt for a top-up loan from your current lender itself. If your loan payments are on track, then there is a high probability that your current lender will accept your top-up loan request.
When you’re unsatisfied with your lender’s service
If your lender does not offer you satisfactory service, then you can consider refinancing your loan. Some instances where a lender fails to provide proper service include:
Failure to issue loan statements on time
Inconveniences paying your loan EMIs online
Bad customer service
Slow in reacting to changing interest rates, etc.
When there is a change in your financial position
There may be situations in life where you may find it difficult to pay your EMIs. Alternatively, your financial situation may be improved that you wish to pay bigger EMIs and complete the loan ahead of time. In either of these cases, check if the lender will be able to accommodate the requests for a change in EMI. If yes, you can continue the loan with your lender and pay the new EMI. If the lender is inflexible, you can opt for a home loan refinance with another lender who accommodates your requests.
Few Points to keep in mind, before Refinancing a Home Loan
#1: If you’re planning to refinance a home loan, it’s highly recommended that you do in the early years of repayment. Shifting the loan to a lender during the later years of loan repayment is not considered a good idea, as you would have finished paying most of the interest component by then.
#2: Be aware of all the fees involved in the transfer like – processing fee, valuation fee and other charges. The savings as a result of the transfer must be more than the total costs incurred during the transfer.
#3: Note that the new lender would treat your home loan as a new loan. Hence, you have to go through all the procedures that you initially completed with your existing lender like property verification, etc.
#4: You have to get approval from your current lender stating that your loan documents will be sent to the new lender within the required time.
#5: The new lender will not approve your request for home loan refinance if you have irregular with your EMI repayments.
Optimise your Home Loan with a Home Loan Refinance
A home loan refinance is the process of shifting your outstanding loan balance to a new lender. It comes in quite handy, helping you enjoy better terms for your home loan, compared to the terms you’re offered now.
However, before you opt for home loan refinancing, you have to consider the overall costs involved in the transfer. If the total savings is higher than the price of the transfer, then you can go for the refinance.