Repricing options: Lowering the rate on a floating-rate loan is the least expensive. By paying 0.5 per cent of the principal outstanding, the interest rate can be lowered to what is applicable for new borrowers.

However, how much benefit this could bring for the borrower depends on future movement of rates. This lower rate needs to be sustained for some period or decline further for the repricing to be lucrative.

However, for a fixed-rate loan the benefit is assured. The fee, however, is higher, at about 1.5 per cent in ICICI and 2 per cent in SBI. HDFC and LIC Housing Finance do not allow repricing of fixed-rate contracts.

For borrowers from HDFC and LIC Housing Finance the only option is to refinance. And they should attempt to do so. The prevailing interest rate of 8-8.5 per cent offers borrowers a lucrative opportunity to refinance their loans. The savings are substantial and the cost will work out to a maximum of 2.5 per cent of the principal outstanding now.

Repricing ways: There is one more important aspect to lowering rates. When you cut rates, you have three options:

Reduce monthly payments and extend loan for 15-20 years;

Reduce monthly payments for the remaining loan period;

Maintain monthly payments and reduce loan period;

The third option is the most lucrative. This provides higher benefit to borrowers because the savings in interest costs are higher.

When you reduce monthly payments, you have the option of investing the surplus and earning returns on it. However, the returns on investment will be higher than the interest on home loan only if the surplus is invested in equity.

If it is not higher than the interest on home loan, reducing monthly payments will not be a lucrative choice.

Besides, when you reduce monthly payments, the tax saved also reduces. This increases the cost of your loan. The cost will increase further if tax benefits are cancelled in later years. As such, maintaining monthly payments and shortening the loan tenure appears the most prudent choice.

Loan conversions: Again, conversion from a fixed-rate to a floating-rate loan is easily accomplished.

Banks and financial institutions are only too willing to accommodate such requests. The fee is also modest, at 0.5 per cent.

However, if the interest rate does rise, you might have to migrate again to a fixed-rate loan and that will involve costs of 2.5-3 per cent. So, it would be better to lower the interest rate on your fixed-rate loan than opt for a conversion.

As for those who are now with floating-rate loans, the time is perhaps ripe to switch to a fixed-rate loan.

In most housing finance companies, only refinancing the loan through some other lender can achieve this.

This, however, should not be a deterrent. Importantly, the magnitude of further decline in interest rate will not be as much as it has been in the past.

So, this may just be the time to migrate to a fixed-rate loan and lock into low rates. Besides, if interest rates do decline substantially, you can still take advantage of it.

So, convert your floating-rate home loan to a fixed-rate loan now and mitigate your risks.

Article E-Mail :: Comment :: Syndication