Home Loan Refinancing: A Small Change That Can Bring Big Savings

Refinancing is one such strategy which can help lower loan EMIs as it allows you to shift your loan to a lower interest rate and better terms

The dream of having your own house is an aspiration held by many and home loans have been instrumental in making that happen. Homeownership has, for decades, been associated with financial security and stability. Considering that, it is no surprise that a recent survey titled the Aspiration Index highlights how homeownership has been among the top aspirations held by Indians for many years. 

However, speaking of recent events, the central bank once again voted to keep the repo rate steady, following a series of rate hikes that saw the repo rate increase by 250 basis points. These rate hikes, which happened between May 2022 and Feb 2023, have resulted in home loans becoming much more expensive, with loan EMIs and tenors becoming untenable for many borrowers. Currently, as interest rates remain high, it is crucial for borrowers to explore ways of reducing their loan burden.  

Refinancing is one such strategy which can help lower loan EMIs as it allows you to shift your loan to a lower interest rate and better terms. Switching your loan, if done right, can help you save on loan EMIs by shifting the loan to a lower rate or reducing your loan tenure. On that note, some factors you must consider before let us understand how refinancing works, the benefits it has to offer, and the factors you must keep in mind before refinancing your loan. 

What Is Home Loan Refinancing?

Refinancing or balance transfer is the process of transferring your loan from the existing rate to a lower rate, either with your current or a new lender. Refinancing can fetch you better terms on your loan, reduce your monthly EMIs, or adjust the loan tenure. There are two ways to go about this-refinance with your existing lender or a new lender. Refinancing with an existing lender may be cheaper with lower processing fee and lesser paperwork compared to a new lender who may levy additional charges. 

How Does It Benefit You?

There are many benefits that refinancing your loan can offer, not just for debt relief, but also for improved financial health. Loan EMIs, especially at the start of the loan tenure, comprise mainly of interest payments. If you refinance your loan to a lower rate, you can save significantly on these interest payments. Moreover, if interest rates drop, they will bring down the effective interest payable and allow you to pay off your loan faster. The amount you save on your loan can then be utilised to fulfil other financial goals. 

To help you understand how refinancing can save you money, here is an illustration comparing your loan cost and savings with refinancing. 

 

Option A: Don’t Refinance		Option B: Refinance With Lower EMI and Rate
Loan Left	25,00,000	Loan Left	25,00,000
Current Rate	9.50%	Current Rate	8.50%
Years Left	9	Years Left	9
Interest	12,28,527	Interest	10,85,425
EMI	₹ 34,523	EMI	₹ 33,198
Refinance Costs (1% of Loan)	₹ 25,000	Refinance Costs	₹ 25,000
Net Savings	₹ 0	Net Savings	₹ 1,18,102
Savings Percent	0%	Savings Percent	9.6%

 

What To Consider Before Refinancing?

• Additional costs involved: Be prepared for additional costs like processing charges and legal fees which may be charged by the new lender. Also check if your existing lender requires a prepayment penalty for transferring the loan. Do the math to ensure your savings exceed the costs.  
• Don’t switch only for lower interest: A lower interest rate, though appealing, should not be the only factor for refinancing. Also consider factors such as the lender’s customer service, credibility, reputation, repayment terms, etc. 
• Loan tenure left: Refinancing can yield the best results when done early on in the tenure of the loan. Since loan EMIs comprise mainly interest payments in the initial years, refinancing towards the end of the loan tenure may not be as beneficial as refinancing in the beginning. 

Understanding how refinancing works can help make an informed decision towards reducing your debt burden. This powerful tool, if used strategically, can lend you the flexibility and means to manage your debt burden more effectively. 

The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.