The status quo on repo rate by Reserve Bank of India (RBI) on August 6 follows a 100 basis point rate cut so far this year, which has brought relief to home loan borrowers, but many are still looking for ways to lower their EMIs further.
One of the key questions that arises now is should one stick with the current lender or scout for a better housing loan rate from another lender?
Renegotiate vs. Refinance
The first step should be to approach the existing lender for a lower rate. This “internal balance transfer” or conversion is the simplest route, as it involves less paperwork, no property revaluation, and faster processing. However, there is a cost - lenders typically charge a switch fee, which could be 0.25–0.5% of the outstanding loan amount, or a flat processing fee.
The second option is refinancing or a full balance transfer to a new lender offering a lower interest rate, which can unlock bigger savings but comes with more effort – in terms of fresh documentation, legal and technical checks, property valuation and additional charges.
Which Option Makes More Sense?
A small rate gap of 0.25–0.5% usually doesn’t justify the hassle of moving to a new lender. If your existing bank agrees to lower the borrowing rate on the home loan at a reasonable conversion fee, staying put is convenient and cost-effective, especially in the later years of the loan, when EMIs are mostly principal.
“Choose renegotiation with the same lender if the rate difference is modest, your existing lender’s conversion charges are reasonable, you value convenience, service continuity, and less paperwork, and you have a shorter remaining tenure and just want mild relief,” said Col Sanjeev Govila (retd), Certified Financial Planner, CEO, Hum Fauji Initiatives, a financial advisory firm.
On the other hand, a bigger rate difference - 0.75% or more - can make refinancing worthwhile, particularly if you’re in the early or middle stage of your loan tenure. “In the first few years, most of your EMI goes toward interest. A sharp rate cut here can save lakhs over the life of the loan. The math works best if your net savings after all switching costs are at least 15-20% higher than staying with the current lender,” said Govila.
EMI or Tenure - What Should You Reduce?
Once a lower rate on housing loan is secured, the borrowers face another choice – whether to cut EMI or shorten the loan tenure. Reducing the EMI eases monthly cash flow, which can help if one has multiple obligations - like funding a child’s education or paying off another loan.
However, keeping the EMI same and reducing the tenure is a smarter financial move, as one pays off the loan faster and saves significantly on total interest outgo. Some borrowers opt for a hybrid strategy - shaving a little off the EMI while also trimming a few years off the tenure for a balanced benefit.
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