Your home loan spread, and when a transfer is worth it

What your rate is actually made of

Floating rate home loans from banks are now linked to an external benchmark, in most cases the RBI repo rate. Your rate is:

Repo rate + spread = your rate

The repo rate is set by the RBI and is identical for every borrower in the country. The spread is set by the lender at sanction, based on your credit profile, loan-to-value, income and the competitive conditions of that month. Once fixed, it generally stays fixed for the life of the loan.

This has a consequence most borrowers miss. When the repo falls, your rate falls — but so does everyone else's, including new borrowers who are also being offered a lower spread because the lender is competing for them today. Over several years, the spread a bank offers new customers can drift well below what its existing customers are on.

Find your spread before you do anything else

It is on your sanction letter, and it appears on the annual statement most lenders issue. If you cannot find it, the arithmetic works backwards: take your current rate and subtract the current repo rate.

Then compare that against what the same lender, and two others, are quoting a new borrower with your profile this month. The gap between those two numbers is the entire question. If it is small, there is nothing to do. If it is meaningful, you have two routes.

The cheaper route first: ask your own lender

Most lenders will reduce an existing borrower's spread on request, for a conversion fee. It is materially cheaper and faster than a transfer — no fresh legal and technical valuation, no new documentation, no re-registration of the charge.

It is also frequently not offered unless you ask, and sometimes not granted until you demonstrate you have an offer elsewhere. Getting a sanction letter from another lender before the conversation is not a bluff; it is how the conversation becomes serious.

When a transfer actually pays

Judge it on total interest over the remaining tenure, net of switching costs — not on the difference in rate, and definitely not on the reduction in EMI.

The costs to net off: processing fee at the new lender, legal and technical valuation, stamp duty on the fresh charge where applicable, and any documentation charges. Floating rate home loans to individuals do not attract foreclosure charges, which removes the largest historical obstacle.

Timing matters more than the rate difference. In the early years of a long loan, almost all of the EMI is interest, so a rate reduction compounds over a long remaining period and a transfer can be clearly worthwhile. With six or seven years left on a twenty year loan, most of the interest has already been paid and the same rate difference saves comparatively little — often less than the cost of switching.

Keep the EMI, not the tenure

When your rate falls, whether through a repo cut, a spread reduction or a transfer, the lender will usually keep your EMI constant and shorten the tenure, or keep the tenure and reduce the EMI. You can generally choose.

Unless you need the monthly cash flow, keeping the EMI unchanged and letting the tenure shorten is the stronger option. The saving goes entirely into principal, and the loan ends earlier. Reducing the EMI feels better each month and costs considerably more over the life of the loan.

The same logic applies to prepayment. A part-prepayment made early, with the EMI held constant, removes interest that would otherwise have compounded for the full remaining term. If you are weighing prepayment against investing the same amount, that is a genuine trade-off worth working through properly rather than by instinct — and it belongs in a wider financial plan, not in isolation.