5 reasons to refinance your home loan now

The process of availing a new home loan from a lender (different from the original lender) to pay off the existing one is referred to as home loan refinancing. The two primary reasons that generally influence this switch is the prospect of a reduced interest rate and tenor as well as a facility that acts like a top-up on the already availed loan. However, there could be other reasons as well at the heart of such a decision. This article explores 5 definite reasons to refinance your home loan right away.

1. Reduced interest payouts

Probably the most important reason behind refinancing - a lower interest rate offered by a lender tempts borrowers to make the switch from the original institution he or she had availed the loan from. Moving over to a lower and better interest rate helps cut down on both the monthly interest payouts as well as EMIs.

It is common knowledge that most home loans are subject to floating interest rates that vary according to the movement of the macro rates prevalent in the economy.

However, some lenders wrongfully stick to the original rate, even in the event of a reduction in the overall rate in the market. Then there are lenders who take more time to adjust their rates of interest. Some don’t reduce the rate as much as the decline observed in the base rate.

2. Switch from a fixed interest rate to a floating one or vice versa

A borrower of a home loan may often find himself stuck in the interest rate limbo – he could either be paying at a higher floating rate than what a fixed rate would’ve brought upon or is subject to a fixed rate of interest when the overall base rate in the economy has moved south. Point to be noted here is that a fixed interest rate is almost always higher than a floating one.

A home loan refinancing then seems legitimate, given the savings the borrower would enjoy with a switch. True, there are certain statutory charges that will be levied for pre-closure of a loan, but again, the renewed savings should ideally negate such risks.

3. Top-up loan facility

Besides a lower rate of interest and a flexible tenor, another potential upside to a loan refinancing is the facility of an incremental loan (often called a top-up) at the prevailing rates of interest.

For instance, a borrower availed a loan worth Rs.30 lakh to buy a property amounting Rs.40 lakh five years ago. Now, after having paid the EMIs diligently over the years, the loan amount stands at Rs.20 lakh. However, the value of the property has appreciated and is Rs.80 lakh now.

This means the borrower can now avail a loan worth Rs.60 lakhs, but only if she settles the outstanding Rs.20 lakhs. In such a situation, what she can do is transfer the outstanding to a different lender at a revised (reduced) rate of interest and get a top-up funding of Rs.40 lakhs.

4. Poor customer service of the original lender

A home loan refinancing can become necessary in case of unflattering customer services offered by the original bank. Such hindrances can be lack of a prompt reaction on the part of the lender to adjust the floating rates of interest in accordance with the macro rate movements or failure to issue timely loan statements.

5. Change in the borrower’s financial status

Any change in the borrower’s income level can warrant a home loan restructuring. Considering income plummets, paying the EMIs every month can suddenly become a financial woe. It would then be wise to switch to a new lender willing to offer a longer tenor such that it eases the burden.

Conversely, a borrower on better financial footing will be able to bargain a reduced tenor, that albeit will increase the payable EMIs, but make sure the loan is settled for good sooner than before.

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