Borrowers turn to home loan refinance as tenure goes beyond retirement, Real Estate News, ET Real Estate

MUMBAI: A year ago, lenders were wooing homebuyers with an interest rate as low as 6.5%. but in the last 10 months home loan Borrowers have seen a sharp 250-basis-point (100bps = 1 percentage point) increase in interest rates. Those who borrowed at 6.5% in April 2022 are now being billed 9%, resulting in their repayment period being extended beyond retirement.

Bipin Salaskar, a government employee, had taken a home loan of Rs 59 lakh from HDFC at an interest rate of 7.6 per cent a few years back. The rate of this loan has increased to 10.1%, thereby extending the loan tenure by two years – beyond their retirement date.

While floating rates mean that borrowers have to pay the rates prevailing in the market, this could be the best time to refinance a loan as lenders are willing to sacrifice some of their margin for new customers. It offers borrowers an opportunity to save up to 100 bps on their loans.

“I approached other lenders to transfer my loan. I shifted to SBI as they offered me a loan at 75 bps less,” said Salaskar. He said that the revised EMI is lower and the original tenor has been restored.

Most existing borrowers do not feel the impact of the increase in rates as they continue to pay Equated Monthly Installments (EMIs). While their EMIs may not change, they will be repaying the loan for many more years as rates go up to make up for the higher cost.

If the loan tenure is extended when the borrower is nearing retirement, due to rising interest rates, lenders usually demand an increase in the EMI or prepayment. Other lenders also offer refinance loans at rates that are lower than what their existing customers are getting. A loan refinance, with the same lender or another, usually entails a 0.5% processing fee.

Rohit Jaitpal, a private sector employee, got a home loan of Rs 50 lakh from HDFC at 6.5% last April, but now the rate has increased to 9%. As a result, Jaitpal’s loan tenure also exceeded his retirement age as it was extended by almost three years. “I negotiated with HDFC and they offered me a lower rate of 8.5%,” Jaitpal said. The lender does not automatically reduce the rate it charges new borrowers as it is contractually bound to maintain the spread over the repo rate during the entire tenure of the loan.

Refinancing makes sense for recent borrowers, even if the new rate is only 25 bps lower. Rate volatility affects borrowers more in the initial years, when the share of interest rate component in the EMI is high. Hence, loan transfer is more beneficial for those with EMIs of multiple years.

Since 2019, all new home loans are linked to an external benchmark rate like repo – the rate at which reserve Bank of India lends to banks. The RBI mandated the linkage primarily to ensure better transmission of policy rate changes. Lenders determine the spread on a benchmark rate based on their funds and cost of operations. They often keep the spread low, especially for new customers to grow their business.

During the pandemic, the RBI reduced the repo rate to 4% to boost credit growth and spur the economy. The lowest home loan rates were then at 6.5%, indicating a spread of 250 bps over the repo rate. Currently, the repo rate is 6.5% and some banks are offering home loans to new customers at 8.5%, which means the spread has narrowed to 200bps.

According to industry people, banks do not have much leeway to offer better deals to borrowers. This is because the difference between their highest FD rate and lowest home loan rate cannot be further reduced. Currently, SBI’s best FD rate is 7.6%, while its cheapest home loan rate is 8.5% – the spread is only 90bps. Experts say that a gap less than this would be unviable for banks.

Locking in an interest rate when the spread is low is beneficial for borrowers, regardless of where interest rates are. For example: Person A, who availed a home loan at 6.5% in 2022, will see his interest rate increase to 9.25% if RBI hikes by another 25bps next month. But Individual B, who managed to get a home loan at 8.5% this month, will see his home loan interest rate increase to 8.75% in the same scenario.

Similarly, if the repo rate falls to 5% in two years, the interest rate for individual A will be 7.5%, while for individual B it will be 7%.

Even though banks offer a lower rate of interest to new customers, they are under no obligation to lower the rate for existing borrowers. Financial planners said that therefore, borrowers should look for offers from other banks if their lender is not open to talks.

However, before transferring loans, borrowers should consider the various costs involved in the transfer, including processing fees and insurance, especially if the loan is nearing its end. Young borrowers should also note that loan term extensions, even after retirement age, should be considered temporary as the rate cycle will keep changing during the loan term.