While floating rates mean that borrowers have to pay the rates prevailing in the market, this may be the best time to refinance loans as lenders are willing to sacrifice some of their margins for new customers.
This provides borrowers an opportunity to save as much as 100bps on loans. Bipin Salaskar, a government employee, had taken a Rs 59-lakh home loan at an interest rate of 7.6% from HDFC a couple of years ago. The rate on this loan has jumped to 10.1%, which has led to the loan tenure increasing by two years — beyond his retirement date.
“I approached other lenders to transfer my loan. I shifted to SBI as they offered me the loan at 75bps less,” Salaskar said. The revised EMI is lower and the original tenure has been restored, he added.
Most existing borrowers do not realise the impact of the increase in rates as they continue to pay the same equated monthly instalments (EMIs). While their EMIs may not change, they will repay loans for many more years as rates climb up to make up for the higher cost.
If loan tenure gets extended when a borrower is close to retirement, due to rising interest rates, lenders usually seek an increase in EMI or a prepayment. Other lenders too offer to refinance loans at rates that are lower than what their existing customers are getting. Refinancing a loantypically entails a0.5% processing fee.
Rohit Jaitpal, a private sector employee, got a home loan of Rs 50 lakh at 6.5% from HDFC last April, but the rate has now increased to 9%. As a result, Jaitpal’s loan tenure too went beyond his retirement age as it was extended by nearly three years. “I negotiated with HDFC and they offered me a lower rate of 8.5%,”Jaitpal said. The lender does not automatically lower the rate to what it is charging new borrowers as it is contractually bound to maintain the spread over the repo rate throughout the term of the loan.
Refinancing makes sense for recent borrowers, even if the new rate is only 25bps lower. Rate fluctuations hit borrowers harder in the initial years when the interest rate component has a higher share in EMIs. Hence, transferring a loan is more beneficial for those with several years of EMIs ahead of them.
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. 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.