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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Anil Kapoor has a Rs 20,00,000 loan outstanding at 9% p.a. with 10 years left. A lender offers to refinance at 8% p.a. for the same remaining tenure, charging a one-time fee of Rs 30,000. The adviser estimates the saving in total interest from the lower rate at about Rs 1,20,000 over the tenure (undiscounted). Which conclusion is most appropriate?

Refinancing looks worthwhile because the estimated interest saving of about Rs 1,20,000 exceeds the Rs 30,000 fee, leaving roughly Rs 90,000 net. The adviser should still compare the present value of the savings against the fee, as the savings arrive over ten years.

  1. ADo not refinance because any fee makes switching unviable
  2. BRefinance only if the rate difference exceeds 3 percentage points
  3. CRefinance, since the undiscounted saving of about Rs 1,20,000 exceeds the Rs 30,000 cost, though the adviser should still check the present value of savingsCorrect
  4. DRefinance, because the fee is ignored in switching decisions

Explanation

Net undiscounted benefit is about 1,20,000 - 30,000 = Rs 90,000, so switching appears worthwhile. A careful adviser still discounts the savings, which are spread over ten years, to confirm viability. The fee cannot be ignored, and there is no rule requiring a 3-point gap.

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