Are you keen to change your current lender? Read this if you feel that you have a better option by switching over to a new lender for your home loan.
Do you feel that you are being overcharged by your current lender for your home loan? If you are feeling the pinch, you have the option to switch your lender. You may go to a bank that is charging less rate of interest on your home loan.
Sushila Ram Varma, Founder and Chief Consultant of Indian Lawyer & Allied Services, says, “Home loan interest rates range anywhere between 9.8 percent to 12 percent and it is advisable to reduce the interest rate if EMIs have been paid diligently for a few years. The most common way to reduce interest rates is to either balance transfer the loan or reset it.”
In fact, balance transfer works best if the borrower is in the early periods of his home loan. In such a case even a 50 basis point reduction will be very beneficial. “For balance transfer, banks charge 0.5 percent of the loan or a flat ’5000-10000 as processing fees. The yardstick to calculate productivity of a balance transfer is a reduction of 100 basis points if tenure left is less than five years, 75 basis points if around 10 years left and 25-50 basis points if 15 – 20 years left,” Varma adds.
Pros and cons of balance transfer Pros
Lower interest rate as compared to existing rate of interest
Less repayment amount as the interest rate gets lowered
More money is saved
Better facilities and offers at some other institution Option of customising repayment procedure
The transfer may become a habit if done frequently
Interest rate should not be the only reason to transfer the loan
Not a good idea to transfer the loan after 2 years as maximum amount of interest has already been paid in this period
It involves the loan approval procedure to be initiated all over again. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank, etc. and a loan will be approved only when conditions are met.
Different financial institutions have different terms and conditions, so there is a likelihood of loan getting disapproved
It may be a trap for the other financial institution to attract new applicants to their banks.
Things to watch out for
A prepayment penalty between 2-5% of the principal outstanding of the loan at the time of refinance could be levied
Processing fee to new lender
It is better to switch the loan early on as it is the tenure of substantial repayment
Get a statement from the current lender stating that property documents will be dispatched within a certain time-frame to avoid hassles
A loan switch will not be possible if the borrower has been irregular with his loan repayment with his current lender.
Tushar Goyal, Head of Business Development and Communication, Meri Punji IMF Pvt Ltd, says, “A home loan transfer is done to avail better interest rates on one’s home loan. There are two kinds of interest rates on home loans – fixed and flexible. As the names suggest, fixed rates are predetermined and do not change over the course of the loan term while flexi interest rates are linked to the Prime Lending Rate (PLR) determined by RBI. If a borrower on fixed interest home loan feels that the PLR will decline in the future he may choose to transfer his fixed interest home loan to a flexi interest home loan, or vice versa.” Shrikant Shrivastava, Chief Risk Officer – India Mortgage Guarantee Corporation (IMGC) maintains, “One must go for home loan transfer, if the interest rate being charged to you by the lender is more than what he is currently charging to new loan customer originated by the lender in the market recently and this stays true for a period of over 6 months / frequency of interest rate reset by your lender as per agreement.”
However, the home loan transfer would not be an assurance that your new lender will not do the same thing on you again over a period of time! If your new lender too charges a higher rate of interest, then you may have to go over the complete process again.
Borrower needs to submit a letter to existing lender requesting a loan transfer
Based on this request, bank will give a consent letter/ NOC and a statement with outstanding amount
This needs to be provided to the new lender, who then sanctions the loan amount to the old lender for an account closure
Then property documents will be handed over to the new lender
New bank will offer borrower a loan based on the current home loan rates.
Resetting vs balance transfer
Resetting home loan with the existing bank is a simpler process. Banks when resetting the interest rate, sometimes lower the loan tenure. This means the EMI will remain the same but the total interest outgo will drop. In cases where the interest rate is reduced and is reflected in terms of a lower EMI, the borrower will have to provide a new ECS mandate and cancelled cheques. This holds true for home loans on floating interest rates and if a fixed home loan borrower wants to lower his rates, he has to first switch to floating rate.