Borrowers refinance home loans as tenures go beyond retirement

The interest rates on home loans have increased by 250 basis points over the last 10 months, resulting in the extension of repayment tenures beyond retirement for many borrowers. While floating rates mean that borrowers must pay the rates prevailing in the market, refinancing loans provides borrowers with an opportunity to save up to 100bps on their loans, as lenders are willing to sacrifice some of their margins for new customers.

Existing borrowers may not realize the impact of the increase in rates as they continue to pay the same equated monthly instalments (EMIs). Refinancing a loan, with the same lender or another, typically entails a 0.5% processing fee. Since 2019, all new home loans have been linked to an external benchmark rate like the repo — the rate at which the RBI lends to banks. The RBI mandated the linkage primarily to ensure better transmission of policy rate changes. Lenders decide the spread they will maintain over a benchmark rate, based on their cost of funds and operations. They often keep the spread low, especially for new customers to grow their business.

During the pandemic, the RBI lowered the repo rate to 4% to boost credit growth and spur the economy. The lowest home loan rates then were at 6.5%, which indicates a spread of 250bps over the repo rate. Currently, the repo rate is at 6.5% and some banks are offering home loans at 8.5% to new customers, which means the spread has narrowed to 200bps.

According to industry players, banks do not have much scope to offer better deals to borrowers. This is because the gap between their highest FD rate and the lowest home loan rate can’t be narrowed further. Currently, SBI’s best FD rate is 7.6%, while its cheapest home loan rate is 8.5% - the spread is just 90bps. A gap any less than this will be unviable for banks, experts said.

Locking on to an interest rate while the spread is low is beneficial for borrowers, irrespective of where interest rates are headed. Even if banks offer interest rates at a lower rate to new customers, they are not obligated to reduce the rate for existing borrowers. Hence, borrowers should look out for offers from other banks if their lender isn’t open to negotiation.

Before shifting loans, however, borrowers should consider various costs involved in the transfer, which include processing fees and insurance, especially if the loan is nearing its end. Younger borrowers should also note that an extension in loan tenure, even beyond retirement age, should be considered temporary as the rate cycle will keep shifting during the loan tenure.

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Borrowers refinance home loans as tenures go beyond retirement

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