With the Reserve Bank of India (RBI) cut the repo rate three times this calendar year, with two 25 basis point (bps) reductions in the first two Monetary Policy Committee (MPC) meetings and a sharp 50 bps cut in the most recent policy, several home owners are considering loan refinancing as they aim to lower interest rates or reduce their EMI burden. However, experts feel that refinancing comes with its own set of challenges, especially costs that are often overlooked. To make an informed decision, it is essential to evaluate the hidden charges that accompany the refinancing process.
Processing Fee
Switching your loan to a new lender usually incurs a processing fee, typically ranging between 0.5 per cent to 1 per cent of the total loan amount.
“For example, for a Rs 40 lakh loan, a 0.75 per cent processing fee would be Rs 30,000 upfront. Some lenders waive this as part of limited-time offers, but borrowers should read the fine print — the fee may be compensated through higher administrative charges or bundled into the loan,” said Atul Monga, CEO & Co-Founder, BASIC Home Loan.
Technical and Legal Charges
When you opt for refinancing a home loan, the new lender will require a fresh set of technical and legal documents to verify the property’s value and legal standing.
“Technical fees cover the cost of property valuation conducted by authorised experts. This evaluation ensures that the property value aligns with the loan amount being requested. These charges can range from Rs 3000 to Rs 5000. Legal charges are paid to lawyers or legal firms to verify the property’s title and ensure there are no encumbrances or disputes. Legal fees can range between Rs 5,000 to Rs 15,000, depending on the complexity of the documentation,” Monga said.
Registration Charges and Stamp Duty
In certain states, such as Rajasthan, Haryana, Punjab and Karnataka, refinancing a home loan may require restamping and re-registration of the existing mortgage. This process can significantly add to the overall cost.
“Stamp duty in such cases can be anywhere between 3 per cent and 7 per cent, depending on various factors like state regulations and borrower demographics. Registration charges can vary, from Rs 50,000 to 1 per cent of the loan amount, and in some states like Himachal Pradesh, it can even go up to 8 per cent,” he added.
Prepayment Penalties
The Reserve Bank of India prohibits banks from charging prepayment penalties on floating-rate home loans. However, this rule does not apply to fixed-rate loans or those availed from housing finance companies. If your existing loan has a fixed interest rate, you may incur a prepayment penalty for early closure. This fee typically ranges from 2 per cent to 4 per cent of the outstanding loan amount, depending on the terms and conditions of your loan agreement.
Involved Administrative Costs
Refinancing a home loan involves submitting various documents, including identity proof, income statements, property papers, and current loan statements. Though often overlooked, this process demands considerable time and effort. Additionally, some lenders charge administrative or processing fees to handle these formalities, which adds to the overall cost and makes it a less straightforward experience for borrowers.
Differences in Interest Rates
One commonly overlooked cost in refinancing is the interest rate mismatch. Although lenders often advertise lower rates, actual savings depend on factors like the remaining loan tenure and the new rate structure. If the loan has only a short time left, the potential savings may be too minimal to offset refinancing costs, making the switch less financially beneficial.
Impact on Credit Score
Every loan application, including refinancing requests, triggers a credit enquiry by lenders. This can result in a slight dip in your credit score. Multiple inquiries within a short period can have a significant negative impact on your credit. While this isn’t a direct financial cost, it can influence your ability to secure loans in the future.
So, home loan refinancing can be a smart move, but only if the long-term savings outweigh the upfront costs.