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In the wake of surging interest rates, home loan borrowers are increasingly resorting to refinancing measures, either with their current lender or by switching to a new one. The motive behind this trend is to mitigate the impact of the hardening interest rates on their monthly loan commitments.
The phenomenon can be traced back to the reduction in the 'spread' over the past year. The spread refers to the difference between the benchmark rate, which is the minimum interest rate investors expect from owning a non-Treasury security, and the actual lending rate. As competition grows fiercer among banks and housing finance companies, and as rates continue to harden, these financial institutions have been forced to slash the spread for new customers.
The hardening of rates has been propelled, in part, by a considerable 250 basis points (bps) increase in the policy repo rate since May 2022. The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks in India. This surge has caused home loan rates, which were hovering around 6.2-6.3% a year ago, to now loom closer to the 9% mark. To put this in perspective, for a loan of ?50 lakh with a repayment period of 15 years or 180 months, an increase in the interest rate by 250 bps would extend the repayment period to 270 months, assuming the equated monthly instalment remains unchanged.
Many lenders have trimmed their spread over the last year. For instance, as per a report by BankBazaar, the State Bank of India's (SBI) spread, which was 275 bps when the repo rate was 5.15% in March 2020, had dropped to 200 bps by March this year. The report further highlighted that the lowest spreads on home loans reached 1.95 in March 2023, a significant reduction from the nearly 3.5 prevalent in March 2020.
This rise in interest rates has severely impacted home loan borrowers who took loans in the past few years when the rates were at their lowest. Many lenders are now offering discounted rates to new customers by reducing the spread, explains a private sector lender executive. Existing customers can also benefit from these lower rates by transferring their balance to another lender or by negotiating a lower rate with their current lender.
Despite the RBI's decision to keep the policy repo rate unchanged in its April review of the monetary policy, many lenders have opted to extend their special home loan rates until the end of April. The special rate for HDFC, for instance, is 8.5% for customers with the best credit rating. SBI is charging 9.15% for customers with a CIBIL score of 800 or above, provided the first disbursement is taken before April 30, while ICICI Bank is charging 9% for its top-tier customers.
This decision coincides with a slowdown in home loan demand due to the sharp rise in interest rates. However, borrowers must be aware that balance transfers may come with associated costs, such as processing fees, which could either be a percentage of the outstanding loan amount or a flat rate. Some lenders may choose to waive these fees as part of special offers.
In conclusion, while refinancing can be a smart strategy to manage the hardening interest rates, borrowers should carefully consider the associated costs and implications before making a decision. Keeping a close eye on market trends and periodically re-evaluating their loan agreement can help them make the most of their home loan.
This story was first published in Business Standard.
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