JOIN USSaving on interest cost: Most home loans are floating rate loans, which means they are linked to overall macro interest rate movements. It is often seen that when home loan rates move upwards all customers rate tend to go north, however, there is a possibility of not all loans coming downwards in the reverse situation.
This makes home loan refinance an attractive option as your current loan gets adjusted to prevailing market interest rates giving you significant interest cost savings and reducing one’s monthly EMI burden.
Zero transfer cost: According to RBI norms, banks are not allowed to charge prepayment charges on home loans, which means that when one transfers from bank A to bank B, there are no transfer costs that is allowed to be charged by bank A as one would be using the funds received by bank B to prepay the loan currently running from bank A.
Additional loan opportunity: Along with home loan refinance, customers also have an option of taking incremental funding at the home loan rates that can be used by the customer. For example, A purchased a property five years ago at Rs 50 lakh and took a Rs 40 lakh loan on the same, currently post paying EMI for five years. Let’s assume that the loan value has come down to Rs 30 lakh, however, the property value may have appreciated to Rs 1 crore, which means now the property can get a loan of up to Rs 80 lakh. A can now refinance this loan to transfer the existing Rs 30 lakh at a lower cost and get incremental funding of Rs 50 lakh (Rs 80 lakh ( new loan value) - Rs 30 lakh (current outstanding)).
Switching to a better home loan product: At the outset, banks have different kind of loans under the home loan scheme, ranging from regular home loans to home saver/credit loans. In the home saver/credit loans, the customer opens a current account along with the home loan, and for any money parked in that account, one is not charged interest on the home loan to the extent of that amount.
For example, if one has a home loan of Rs 50 lakh, and keeps Rs 30 lakh in the home saver/credit account, the customer is charged interest on only Rs 20 lakh, significantly reducing interest outflow.
These loans are smarter and more efficient, now there is a possibility that when the customer took the loan — one took a regular home loan, however, one can now refinance their loans to banks that offer these innovative home saver/credit loans for maximum interest savings.
Moving from floating rate loans to fixed loans or vice versa: Customers may be in any of these scenarios where they are either paying a high floating rate and seeing a value in moving to a fixed rate home loan where they know their EMI will be constant for a period of time, or can be stuck on a fixed home loan at a higher rate, and see that the overall interest rates have moved southwards and floating rate loans are much cheaper than their loans, and there is value in switching the loan.
Overall, home loan refinance is a powerful option for the regular retail consumer, however, there is limited awareness about the same among consumers, who can have significant savings if they choose to consistently refinance their loans.
(The writer is co-founder and CEO of Finance Buddha)