Home loan interest rates have hit rock bottom. The rates started softening in 2019 after the Reserve Bank of India announced that personal and retail loans will be linked to external benchmarks instead of MCLR (Marginal Cost of Funds-Based Lending Rate). The falling interest rate cycle that kicked in around the same time also helped. At present, an individual with a good credit rating may borrow at rates as low as 6.50%, offered by Kotak Mahindra Bank. Other major banks such as Punjab National Bank, ICICI Bank, State Bank of India, Axis Bank and HDFC Bank are lending at 6.55-6.75%. Unarguably, it is an opportune time to refinance your home loan to reduce the interest burden.
Simple calculations show that refinancing can save you lakhs in the long term. The higher the loan tenure or the outstanding loan amount, the higher will be the savings. An individual with outstanding loan amount of ₹30 lakh—who is currently paying 7.5% per annum—can save close to ₹4.3 lakh in 20 years if she is able to refinance at 6.5 per cent per annum.
Similarly, you can save about ₹29 lakh over 20 years on a loan amount of ₹2 crore by switching from 7.5% to 6.5% per annum.
The illustration assumes 6.5% interest rate as it is the lowest available rate at present. However, not all borrowers will be eligible for this rate. The interest rate largely depends on the borrower's credit score. A borrower with a lower credit score has to pay a higher rate. In some cases, lenders may refuse to lend to a borrower with a poor credit history.
When does refinancing not make sense?
Apart from the low rate, you also need to look for post disbursement services and quality of digital customer service provided by the lending institution. Also, take note of processing and administration fees before agreeing to a fresh loan agreement. Do the calculations first to see if you will save in the long term. If the costs do not justify the shift, do not go for it.
Also, if you are nearly through with your loan repayment, you better stay with your existing lender.