Is now the right time to switch my home loan to another lender? While Reserve Bank of India (RBI) has not decided to cut interest rates in its recent monetary policy review, banks have already started dropping deposit rates for tenure of one year. This is an indication that lending rate cuts will follow soon too. If you think that lower home loan rates with other banks would present you the opportunity to lower you interest burden, you should think again. In the recent past wholesale and consumer inflation has cooled off but EMIinflation has refused to budge. This is because RBI is still in wait and watch mode before commencing interest rate cut. However, with inflation under control, the rate cuts will happen sooner or later. And banks too would pass on the benefit to their new customers. But if you already have a home loan, making a switch for a lower rate cut would seem enticing. Keep in mind the following things before you go ahead. 1. Do cost benefit analysis It is important that you should do a thorough cost benefit analysis before making the home loan switch. It’s the interest portion that pinches the pocket. Therefore, your aim should be to save as much as possible on the interest portion payable to the bank. Ideally, you should not make a switch unless the rate cut is at least 0.75-1.00 per cent. The remaining loan tenure and difference in interest rates together play an important role in making the decision to shift Lower the tenure, higher should be the rate cut and vice-versa. So for instance your remaining balance tenure is less than five years, then the difference in the new and existing rate should be at least one per cent. On the other hand, if the outstanding tenure of your loan is around10 years, then 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 to 20 years, you can save a lot of money even on a rate cut of 25 to 50 basis points. However, these are thumb rules and you should do your own calculation. 2. 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 to another one and might shift you to a lower rate that they are offering to their new customers. In most cases your bank would charge a conversion fee which
ranges between 0.5 and 1 percent 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. 3. Consider new bank’s terms & conditions Shifting your loan to a new bank is not an easy ride. The lender would consider a host of factors before disbursing you the loan. One of them is your repayment record with the previous lender. If you have defaulted few times or simply were late in paying your EMIs, your request could be turned down. In case of loan for the property under construction, the former should be on the pre-approved list of the lender. Also your new lender might not consider giving you loan if the construction on your home is behind schedule. All the above factors are important and must be considered before shifting home loan to another lender. Rajiv Raj, Director & Co-Founder, creditvidya.com Source: CommonFloor.com For Latest Updates on Real Estate Updates, Property News and Cities Infrastructure Developments Visit: http://www.commonfloor.com/guide
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