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When to Refinance Your Home loan
In the last decade or more since the Global Financial Crisis of 2008, borrowers have had it easy. Most central banks were keen to kick-start consumption and followed a liberal monetary policy. They wanted retail customers to borrow and spend to kick-start economies. As a result, liquidity was high, and interest rates were low.
However, that has changed with recent events, including the war in Ukraine and rising energy and food prices. It has forced most central banks to adopt a more hawkish stance.
As a consequence, interest rates are rising worldwide, including in India. The fact is that these global cues – while seemingly far away -- have a direct bearing on retail home loan borrowers. Most banks and housing finance institutions have raised their interest rates impacting the EMIs (Equated Monthly Instalments).
What should the home loan borrowers do in such a scenario? How can they mitigate the adverse effect on their finances? The obvious answer would be to refinance the loan to reduce the impact of the global crisis. In reality, though, it is not as simple, and borrowers need to consider a few factors.
Should you switch to a fixed interest rate home loan?
If you are on a floating interest rate home loan, chances are that the rates have increased recently. And there are indications that there could be further hikes per the policy rates. In such a scenario you may be wondering whether you should switch over to a floating interest rate loan. The answer to that depends on the difference between the rates of the floating and fixed interest rates of your bank. If the difference is more than 1% or 100 percentage points, then it may not offer you much benefit. This is because the fixed interest rate loan will be the same during the entire residual tenure of the loan, while in the case of the floating-rate loan there are chances that the rate may decrease once the interest rate cycle starts moving downwards. So, assess where you stand and then decide.
Can you shift to a lower interest rate with your existing lender?
Most banks will allow you to move a more favourable interest regime at a cost – from floating to fixed or vice versa. There could be costs attached, such as processing charges, etc. Speak to your lender, and figure out the cost before deciding.
How does one refinance the debt from one lender to another?
If your existing lender is not inclined to change the interest rate for whatever reasons, you always have the option of refinancing the debt by moving to a new bank. In this case, the new lender pays off the old one and takes the debt on its books. You may need to pay processing fees, legal charges, etc. Therefore, you need to ensure that such a move is financially viable.
[Also Read: What Type of Home Loan is the Best one for You?]
Top Up
Another reason to refinance your home may have nothing to do with rising or falling interest rates. It could be because you need extra cash for any personal or professional need. In such a situation, you can opt for a top-up loan from your existing lender. If the lender is reluctant to do the deal, you could do a ‘Balance Transfer and Top Up’. This is like the earlier deal, except that the new bank not only takes your loan on its books but also advances you with additional funds. This kind of transaction too may involve processing fees. So, do your due diligence before making a decision.
Axis Bank offers an array of affordable and flexible home loans designed to suit the requirements of all home buyers. To explore Axis Bank's wide range of products for the most competitive Home Loan interest rates, extended loan tenures and other benefits like EMIs waivers, click here.
Visit Axis Bank's Home Loan affordability calculator and home loan EMI calculator to give you an estimate of your EMI and know more about Axis Bank Home Loans.
Disclaimer: The Source, a content creation and curation firm, has authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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