Go for home loan refinancing when rates are low, tenure long
With home loan rates near rock bottom, is it a good time to refinance your home loan? Let us take a look by first understanding what home loan refinancing is. Refinancing a home loan means paying off a current home loan and replacing it with a new one.
The new loan can be availed with the same lender or from a new one. In this process, the old loan is closed and you can start payments on the new one. A loan with good payment terms helps you increase long-term savings on interest.
For instance, a loan of ₹50 lakh at 8% for 20 years accumulate interest of about ₹50.4 lakh. But if this loan is refinanced at 7%, the interest will fall to around ₹43 lakh, ensuring savings of nearly ₹7 lakh, which you could use to fulfil other financial goals such as travel, buying a new vehicle or pursuing higher education.
Looking at past trends, home loan rates have fallen at a slower rate. Loans from large lenders were priced above the 8.5% mark in 2018, rising marginally from the lows in 2017.
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Then, bank loans were still benchmarked to the marginal cost of funds-based lending rate (MCLR). Following the Reserve Bank’s October 2019 directive, retail loans got cheaper. Home loans dipped below 8% for the first time. With the pandemic, the rates continued to fall, once even falling to 6.49%, as per BankBazaar Aspiration Index report.
Hence, there are many reasons why homeowners should refinance their home loans.
First, when there’s a significant delta (difference) in the rate on your existing loan and the rates being currently offered in the market, it may be time to consider refinancing. “The impact of the delta varies from one borrower to another. But in most cases, a difference of more than 50 basis points warrants a look at your loan options because you are paying a much higher rate than you need to,” said Adhil Shetty, chief executive officer, BankBazaar.com
