Should you switch Home Loan to another bank?

Due to a high disparity between interest rates for existing and new customers, several home loan customers are unhappy with the high rates they are being forced to pay. But when banks start discriminating between you and its new customers, it’s time for you to switch home loan to a lower interest rate and save money!

What is Refinance of Home Loan 

When interest rates are lowered by banks, the new rate is often applicable for new borrowers and not for the existing borrowers. Many existing borrowers would look to switch their home loan to another lender in order to take advantage of the new rate and lower their EMI. This is also called refinancing.

Why should you switch home loan

There may be instances where though your bank has cut rates, you still continue to pay a higher rate of interest. In such a scenario, you can consider switching lenders. The decision to switch or not to switch a home loan is a calculated decision as interest rate is not the only factor to consider.  Here are a few things you should keep in mind before you make such a move:

1. Do cost benefit analysis

It is important that you carry out a thorough cost benefit analysis before you switch home loan. It’s the interest portion that pinches the pocket. Therefore, your aim should be to save as much as possible on the interest payable to the bank. Ideally, you should not make a switch unless the rate cut is at least 0.75-1.00 per cent.

Lower the tenure, higher should be the rate cut and vice-versa. So for instance your remaining balance tenure is less than five years, the difference in the new and existing rate should be at least 1 per cent. On the other hand, if the outstanding tenure of your loan is around 10 years, don’t settle for anything lower than 0.75 per cent. In case of longer tenures, a small rate cut can have a major impact. In case the balance tenure is as long as 15-20 years, you can save a lot of money even on a rate cut of 25 to 50 basis points (0.25-0.50 per cent).  To help you, we will try to explain this process with two steps. However, these are thumb rules and you should do your own calculation.

Step 1: Compare the lower interest rate of the home loan product where you want to switch to with your existing home loan rate. For instance, the monthly installments on a home loan of Rs.40 lakh with an interest rate of 10.20% per annum and a tenor of 20 years will drop by about Rs.530 per month if the new loan is available at 10%. The total interest payout will be lower by around Rs.1.27 lakh.

Step 2: This is a repeat of Step 1, but with the remaining term of the outstanding loan. Let’s assume you took a loan in April 2010. This means that the remaining tenor of the loan is 15 years. The outstanding loan balance will be around Rs.36 lakh. If you switch the loan to a lender that offers 10% interest rate, your EMI will reduce by around Rs.440, which means a saving of about Rs.79,400 on the total interest cost. If the same loan had 5 years remaining, the outstanding balance would be Rs.18.33 lakh. Moving to a loan of 10% rate will mean the EMI coming down by around Rs.180, and total interest cost saving of about Rs.10,700.

You can use online calculators such as this one to do the analysis.

2) Keep in mind the Foreclosure Charges

Decision to switch home loan comes with a cost. So, include this in the calculation. Besides the interest rate on a home loan, you will have to check the foreclosure charge of your existing bank and the processing fee of the new bank. There is no prepayment charge on floating rate loans, but some fixed rate loans may have it. The processing fee on the new loan can vary from 0.25% to about 1% of the total outstanding loan amount, or it can be a flat fee of 10000/-

In the example that we used in Step 2, if 15 years remain on the loan, and the bank asks for Rs.10,000 as processing charge, your total savings gets reduced to Rs.69,400. If the processing fee is, say, 1%, your savings get reduced to about Rs.42,000. This means that if the processing fee and other changes add up to be higher than the total interest cost you would save, it doesn’t make sense to switch the loan.

If you have concluded to transfer your loan, you can follow this easy guide: How to transfer your Home Loan to another bank?

Explore the option of internal switch

Before deciding to move to other bank for a lower interest rate on your home loan, it is always prudent to check with your own bank if it is willing to offer the same. Most banks do not want to lose an existing customer. Instead, they might shift you to a lower rate they are offering to their new customers. In most cases, your bank would charge a conversion fee ranging from 0.5 to 1 per cent of the outstanding amount. Another advantage of negotiating with your existing lender is that you would save on time and paperwork. The new lender would go for your credit evaluation and verification of the property as well as in case of a new customer. Besides, you have to shell out legal fees and stamp duty even if the processing fee gets waived off. All these charges would add on to your cost that you must factor in.

Here are few points you must take into account.

•    One should always check the timing of loan switch to new bank: Always try to switch the loan in the early tenure of loan. It is not advisable to transfer your loan after 2 – 3 years of loan payment. As you have already repaid most of the interest amount and in the process of transfer, you will shell out more amount as fees.

•    Always study processing fees & other charges: One should always consider the processing fees, legal charges, valuation fees, stamp duty and other charges which a new bank is going to charge. Then accordingly compare it with the benefit of reduced interest rate.

•    Check the Teaser loan Terms and Conditions: Of late, the home loan transfer has been most essential when the teaser loan scheme hits the market. One should always keep in mind that the teaser rate is for a limited time frame and will adjust after that time.

•    Take Documents in Time: Always take statements from current lender that documents of property will transfer to a new lender within a stipulated time frame. It will lead to hassle free transfer of the loan.

Conclusion

Generally, if you have a long tenor remaining, switching is likely to be more lucrative than if the end of the tenor is approaching. Switching is equivalent to taking a new loan. You have to be willing to go through the tedious paperwork to get the benefit of the new rate. Keep in mind that refinancing can sometime take time and you should keep enough buffer if you are expecting a demand note from the developer.

If you have concluded to transfer your loan, you can follow this easy guide: How to transfer your Home Loan to another bank?

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