Reducing home loan: Switch to lower-cost loan if credit profile improves

Until repo rate cuts begin, borrowers can explore other options to lower their home loan burden

Home loan borrowers’ wait for interest rate cuts to begin continues with the Reserve Bank of India’s (RBI) monetary policy committee keeping the repo rate unchanged after its December 4-6 review. The repo rate rose by 250 basis points between May 2022 and February 2023, leading to increased equated monthly instalments (EMIs) or extended loan tenures for borrowers. Until rate cuts begin, borrowers can explore other options to lower their home loan burden.

  Negotiate a rate reduction

  Banks and housing finance companies (HFCs) often agree to red­uce the home loan interest rate for a one-time fee, especially for borrowers with a consistent repayment record. This is offered to customers who are at a higher rate than the best rate offered by the lender.

  “Lenders are often willing to lower the rate to the tune of 5-15 basis points as there is always a chance that home loan borrowers may opt for a balance transfer,” says Raj Khosla, founder and managing director, Mymoneymantra.com.

  A formal written request needs to be made to the lender for a rate adjustment.

  Consider a balance transfer

  If the current lender refuses to lower the rate, a balance transfer to another lender offering better terms is an option. “Existing home loan borrowers who have witnessed significant improvements in their credit score, monthly income, job profile, and other facets of their credit profile after availing their existing home loan can opt for a balance transfer,” says Ratan Chaudhary, head of home loans, Paisabazaar.

  Here, borrowers would capitalise on the competition within the home loan market. “Go for a balance transfer if a lender is willing to reduce the home loan rate by 30-50 basis points. Some home loan borrowers can get a reduction of 80 basis points if the current loan is at more than 9.5 per cent,” says Khosla.

  Assess costs and benefits

  Before proceeding, evaluate the financial feasibility of a balance transfer. “The savings after refi­nan­cing should exceed the exp­enses. Compare the terms offered by various lenders, such as interest rate, fees, repayment flexibility, and paperwork,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com.

  Once approved, the borrower signs a fresh agreement with the new lender. The latter settles the loan with the old lender. Balance transfers are most effective early in a loan tenure. “Balance transfer is principally designed to benefit borrowers who have repaid up to 20-30 per cent of the principal. It becomes less beneficial if a borrower has already repaid 70-80 per cent of the principal,” says Khosla.

  Make prepayments

  Another option is to increase EMI payments, or make lump-sum prepayments, to reduce tenure and interest cost. “If switching or negotiation is not feasible, consider paying a higher EMI to reduce your loan tenure. For faster debt repayment, aim to pay off 5 per cent additional loan balance annually,” says Shetty.

  After partial prepayment, Chaudhary suggests opting for tenure reduction as it leads to higher interest savings. “Only those seeking a higher monthly disposable income should opt for EMI reduction,” he says.

  Buyer beware

  While a balance transfer can be beneficial, avoid too many applications as this can harm your credit score. “Lenders may enquire about your credit score for refinancing your loan. Several such enquiries can im­pact your score and eligibility for future credit,” says Shetty. 

Seek a loan counsellor’s advice, if required, as the procedure of balance transfer can get complicated.   

Smart tips on prepayment

- Understand prepayment terms of lender before taking a loan: Some allow multiple prepayments per year; others may restrict the frequency or set minimum amounts; go for prepayment terms that match your cash flows

- The sooner you begin prepaying, the more you will save on interest

- Use unexpected income or bonuses to make lump-sum prepayments when possible

- Make regular prepayments: Paying even one extra EMI per year can reduce your loan tenure by two-three years

- Balance prepayment with saving for other financial goals like retirement and children’s education