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When should you opt for a home loan switch over?

It is important to time the loan refinancing in such a way that saving on interest payable is maximised.

Jun 24, 2019, 06.30 AM IST
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Opt for refinancing only if potential savings, in the long run, are significant.
Over the last few quarters, the Reserve Bank of India (RBI) has lowered the repo rate by 0.5%, which has been followed by rate cuts by banks and lenders. This has resulted in lowered home loan rates for borrowers. Nitish has a home loan of Rs 2 crore that he availed at an interest rate of 11.25%. The tenure of his loan is 20 years. After making payments for seven years, he wants to refinance his home loan for the remaining tenure at an interest rate of 10.50% to take advantage of the falling interest rate cycle. Will this be a wise decision? Should he opt for a balance transfer?

Many existing borrowers would explore switching over their home loan to another lender in order to take advantage of the new rates and lower their EMI. If done properly, refinancing can be very beneficial. However, before Nitish goes any further, he must do a thorough cost benefit analysis. It is important to time the loan refinancing in such a way that saving on interest payable is maximised.

Nitish will find switching lucrative as he has covered only seven years of his loan tenure. This means a large portion of his principal is outstanding, as his EMI is mostly made up of the interest component. As time goes by, the interest component comes down and the principal component goes up.

Therefore, instead of making the switch decision by only considering the interest rate differential, Nitish must make sure that he factors in all the costs (including prepayment charges and processing fee of the new loan) and the hassles of repeated paper work that goes into balance transfer, when computing the potential savings. Needless to say, refinancing is a profitable move only when the potential savings in the long run are significant.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

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