Switch or stay? How to bag a lower home loan rate

Renegotiate or Refinance?

With the Reserve Bank of India cutting the repo rate to give growth a push and inflation relatively well managed, interest rates on home loans have started to soften. For lakhs of home loan borrowers, this has sparked a fundamental question: should I shift to a lower interest rate, and if so, should I do it with my existing lender or switch to a new one?

If you’re asking this, you’re already ahead of the curve. Most people forget about their home loan once It is set up. But just like investments, so does your biggest liability, your home loan, needs monitoring.

As someone who advises thousands of armed forces families, I believe the decision is not simply about finding the lowest rate. It’s about strategy, timing, cost-effectiveness and whether the switch supports your larger financial goals.

Two options: renegotiate or refinance

Most borrowers first try to negotiate a better rate with their existing lender. This is often easier, less paperwork-heavy and saves the trouble of fresh documentation but it isn’t free. Banks and non-banking finance companies (NBFCs) typically charge a conversion or switch fee, usually between 0.25 percent and 0.5 percent of the outstanding loan amount or a flat processing fee.

Your second option is a full refinance (or balance transfer) to another lender offering a lower rate. This may bring more savings but also involves a bigger effort, more documentation, revaluation of the property and some legal, technical and administrative costs.

Which option is better and when?

Choose renegotiation with the same lender if the rate difference is modest (0.25 percent to 0.5 percent), 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.

Choose refinancing with a new lender if the rate difference is significant (0.75 percent or more), you’re in the early or mid-stage of your loan tenure, your current lender won’t budge on reducing rates and the savings are large enough to justify switching charges

Either way, don’t act emotionally or out of urgency. Run the numbers.

Do the math: Is it worth the trouble? A good decision is built on a simple equation:

(Monthly savings × remaining tenure in months) – switching costs = net benefit

If your net savings are 15–20 percent more than the costs, the move is financially sensible. For example, if you save Rs 2,000 a month for 120 months ( Rs 2.4 lakh), but pay Rs 25,000 in switch/conversion costs, you’re still  Rs 2.15 lakh better off. But always remember to get a written quote from your lender showing the new rate post-conversion and calculate your savings before signing anything.

The stage of your loan makes a big difference. In the early years, most of your EMI goes toward interest. A lower rate here brings substantial gains — this is the best time to act.

In mid-tenure, refinancing or switching can still make sense if the rate gap is big enough to offset conversion/refinancing fees. In the final years, you’re repaying mostly principal. Rate reduction brings limited benefit here unless you’re also looking to consolidate debt or take a top-up loan.

Another dilemma is whether to shorten the loan tenure (generally the default option) or reduce the EMI.

• Reduce your EMI if monthly cash flow matters (say, your child is about to enter college or you’re managing parallel EMIs).
• Keep EMI the same but shorten the loan tenure. This saves far more on interest and gets you debt-free faster.
• A hybrid strategy could be to reduce both EMI and tenure slightly. Balanced benefit.

Will it impact your credit score? Negotiating with your existing lender has no impact on your credit score. Refinancing may involve one or two credit pulls, which is acceptable. But don’t apply to too many lenders at once. Multiple inquiries in a short time can raise red flags.

Fixed vs floating

Floating rate loans are popular right now because they tend to reflect RBI movements quicker. If inflation remains in check and growth is prioritised, rates may remain soft for a while. Floating is the smarter bet but only if you can manage a future rate increase comfortably, if it happens.

Fixed rates offer stability. If the offered fixed rate is close to floating and you value certainty, it's a valid option, especially if you’re nearing retirement or managing a tight budget.

Finally, your home loan isn’t just a liability, it’s a tool. And like all tools, it needs sharpening occasionally. Whether you’re negotiating with your current lender or switching to a new one, don’t treat it as a one-off administrative task. Treat it as part of your ongoing financial health check.

And remember: the best borrowers aren’t just the ones who pay on time, they’re the ones who make every rupee of interest work for them, not the bank.

Make your home loan smarter. It’s time you did so now.

(The writer is a Certified Financial Planner, CEO, Hum Fauji Initiatives, a financial advisory firm)

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.