Home loan borrowers turn to refinancing amid rise in interest rates

Lenders cut spread to attract new customers

Home loan borrowers — who are the worst hit following steep rise in interest rates — are increasingly refinancing their loans with another lender or with the same lender to minimise the impact on hardening rates.

This is because the spread — the difference between the benchmark rate and the actual lending rate —has narrowed in the past year. Banks and housing finance companies have cut the spread for new customers amid stiff competition and the hardening of rates.

With the policy repo rate rising 250 basis points (bps) since May 2022, home loan rates which were around 6.2-6.3 per cent a year ago are now hovering around the 9 per cent mark.

For a loan of Rs 50 lakh, where the repayment period is 15 years, or 180 months, a rise in interest rate by 250 bps means the repayment period climbs up to 270 months if the equated monthly instalment remains the same.

Most lenders have reduced their spread in the past year.

According to a BankBazaar report, State Bank of India’s (SBI’s) spread, which was 275 bps when the repo rate was 5.15 per cent in March 2020, has fallen to 200 bps in March this year.

“According to a research by BankBazaar, the lowest spreads on home loans stood at 1.95 in March 2023, steadily falling from the nearly 3.5 prevalent in March 2020,” the report said.

According to bankers, home loan borrowers who have taken loans in the past few years when home loan rates were at their lowest are the worst hit due to sharp rise in interest rates.

“Many lenders are offering discounted rates to new customers. That is done by reducing the spread,” says an executive from a private sector lender.

To get the benefit of a lower rate, existing customers can transfer their balance to another lender or negotiate with the same lender for a lower rate.

After the Reserve Bank of India decided to keep the policy repo rate unchanged in the April review of the monetary policy, many lenders decided to extend their special home loan rates, at least until the end of April.

The special rate for HDFC Ltd is 8.5 per cent for the best customers in terms of credit rating (above 760). SBI is charging 9.15 per cent for customers with a CIBIL score of 800 or above, if the first disbursement is taken before April 30. ICICI Bank is charging 9 per cent for the best customers.

The decision to continue with the special rates also comes at a time when home loan demand has slowed down, following a sharp rise in interest rates.

However, there could be a cost associated with the balance transfer. Some lenders charge processing fees — which could be a percentage of the outstanding loan amount or a flat rate. Often lenders waive the processing fee as a special offer. In case the borrower is switching from one lender to another, he/she will have to pay stamp duty to the state government — the rate of which varies from state to state.