Borrowers refinance home loans as tenures go beyond retirement

ITR filing

Mumbai: Lenders enticed homebuyers with a decadal-low interest rate of 6.5% a year ago. Yet, house loan borrowers have experienced a significant 250-basis-point (100bps = 1 percentage point) increase in interest rates during the past 10 months. The repayment period for those who took out loans in April 2022 at a 6.5% rate has now been extended past retirement because they are now being charged 9%.
Government employee Bipin Salaskar obtained a home loan from HDFC a few years ago for Rs 59 lakh with an interest rate of 7.6%. This loan’s interest rate increased to 10.1%, which resulted in an extension of the loan’s maturity by two years, past the date of his retirement.
Although borrowers must pay market rates due to floating rates, now may be the optimum moment to refinance loans since lenders are prepared to give up some of their profits for new clients. As a result, borrowers have the chance to save up to 100bps on their loans.
“I sought loan transfers from other lenders. Salaskar stated, “I changed to SBI since they offered me the loan at 75bps less. He said, “The original tenure has been restored, and the revised EMI is cheaper.”

Due to the fact that they continue to make the same equated monthly payments, the majority of current borrowers are unaware of the effects of the rate increase (EMIs). Even while their EMIs might not alter, consumers will pay back loans over a longer period of time when rates rise to cover the increased cost.
Lenders typically ask for a larger EMI or a prepayment if a borrower’s loan term is prolonged as they come closer to retirement because interest rates are rising. Additionally, other lenders provide loan refinancing at rates that are lower than those offered to their current clients. A typical processing cost for refinancing a loan, whether with the same lender or another, is 0.5%.

The interest rate on the home loan that Rohit Jaitpal, a worker in the private sector, obtained from HDFC in April climbed to 9%. As a result, Jaitpal’s loan tenure was increased by over three years, taking it past his retirement age. Jaitpal stated, “I talked with HDFC and they provided me a reduced rate of 8.5%.” The lender is contractually required to maintain the spread over the repo rate for the duration of the loan, so it does not automatically drop the rate to what it is charging new borrowers.
For recent borrowers, refinancing makes sense even if the new rate is only 25 bps cheaper. Because the interest rate component of EMIs makes up a larger portion in the early years, rate swings affect borrowers more severely. So, for people who have several years of EMIs ahead of them, transferring a loan is more advantageous.

The repo, or the rate at which the RBI lends to banks, has been the external benchmark rate for all new house loans since 2019. The main reason the RBI required the linkage was to improve the transmission of changes in policy rates. The margin that lenders will maintain over a benchmark rate is determined by their cost of funds and operating expenses. To expand their business, they frequently keep the spread modest, especially for new clients.

In order to encourage credit development and stimulate the economy during the epidemic, the RBI cut the repo rate to 4%. The lowest mortgage interest rates at the time were 6.5%, which is a spread of 250 basis points above the repo rate. The difference has decreased to 200bps at the moment when the repo rate is 6.5% and certain banks are providing house loans to new consumers at an 8.5% rate.

Industry players claim that banks have little room to give borrowers better bargains. This is due to the impossibility of further closing the gap between their top FD rate and lowest home loan rate. The margin between SBI’s best FD rate of 7.6% and its cheapest home loan rate of 8.5% is currently just 90 basis points. Any gap less than this, according to analysts, will make banks unprofitable.

Regardless of where interest rates are going, borrowers benefit from locking in a rate while the spread is low. For instance: If the RBI implements another 25bps walk next month, Person A, who got a home loan at 6.5% in 2022, will see his interest rate increase to 9.25%. Yet, person B, who was successful in obtaining a mortgage at 8.5% this month, would experience an increase in his mortgage’s interest rate to 8.75% under the identical circumstances.

Similar to this, if the repo rate dropped to 5% in two years, individual A would pay 7.5% in interest while individual B would pay 7%.

Banks are not required to lower interest rates for current borrowers even if they offer lower rates to new consumers. Thus, if their lender isn’t amenable to bargaining, debtors should watch out for offers from alternative banks, according to financial planners.

However, before transferring loans, borrowers should think about the associated costs, such as processing fees and insurance, particularly if the loan is about to mature. Younger borrowers should be aware that a loan extension, even until retirement age, should only be regarded temporary because the rate cycle will continue to change during the loan term.