By India Today Business DeskIndividuals who have taken out a home loan over the past two years have found themselves in a tight spot due to non-stop interest rate hikes from May 2022.
As interest rates increased from a decade-low of 6.5 per cent to over 9 per cent after a 250 basis point hike in rates, the loan repayment tenure for many borrowers has stretched beyond their retirement age.
Since banks do not allow the repayment tenure to exceed the retirement age, the EMI burden on such individuals has significantly increased.
Even individuals whose tenures have been extended without any change in EMI will end up paying for many more years.
Simply put, the aggressive rise in interest rates has severely disrupted the finances of new home loan borrowers, since interest payments are higher at the beginning of a tenure.
But there are ways in which borrowers can prevent tenure from crossing their retirement age and also reduce their interest burden. Loan refinancing is one of the best ways to reduce the burden of high interest rates and prevent the tenure from extending too much.
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What is loan refinancing?
One of the ways to lower the interest rate burden and prevent substantial extension of loan repayment tenure is to get a loan refinanced.
Loan refinancing is the process of replacing an existing loan with a new loan that has better terms – such as a lower interest rate and shorter tenure. It usually involves a processing fee of 0.5 per cent, but is hugely beneficial in the long run.
When you refinance a loan, you essentially take out a new loan to pay off the old one. It may be noted that the most common type of loan refinancing is mortgage refinancing, which involves replacing an existing mortgage loan with a new mortgage with better terms.
In fact, many lenders are willing to offer sweeter deals for new customers willing to get their loans refinanced. They offer lower interest rates, allowing both lower interest payments and shorter tenures.
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Many banks are willing to accommodate loan transfers for people who have found that their existing loan conditions have substantially increased their EMIs or pushed the tenures beyond the retirement age.
Anyone opting for a mortgage refinance can get a benefit of 75-100 basis points, meaning the interest rate applicable on the loans would drop by 0.75 per cent to 1 per cent.
This could help home loan borrowers significantly lower their monthly EMI, prevent the tenure from extending or even lower it in some cases.
When opting for a loan refinance from another bank, do not forget to negotiate terms to get the best deals. Most banks are more than willing to take up new customers, even if it means providing a better term.
Recent borrowers benefit most from refinancing
However, loan refinancing makes more sense for recent borrowers. Even if they get a benefit of 0.25 per cent to 0.5 per cent, it is beneficial. This is because the interest rate component of a loan is higher in the initial years and any upward rate movement could significantly increase the burden.
Therefore, people with several years or decades of EMI payments left should ideally consider loan refinancing as the interest payments are higher than the principal.
While all new home loans have been linked to the repo rate since 2019, lenders often decide their own spread over the benchmark rate, based on various factors like costs and processes.
To attract new customers or provide refinancing options, many banks are often willing to lower their spread to get more business.
In conclusion, rising home loan rates have technically pushed repayment tenures for many individuals beyond their retirement age, causing financial distress. However, refinancing loans at lower rates is an option that could help mitigate the impact of rising rates.
Wilmer Bode
Harvey Wiegand
Rodolfo Frami