Switch your home loan, if rate is above 12%
Switch your home loan, if rate is above 12%
Last week, the country’s largest bank, State Bank of India (SBI), decided to reduce the interest rate burden of existing home loan borrowers by allowing them to switch their loan to a lower interest rate. The new rate is in the range of 10.75-11.25% per annum, depending upon the loan tenor. However, you need to pay a fee of 1% for the switch.
Some experts say that it’s also meant for those who took teaser loans. Says Adhil Shetty, CEO, Bankbazaar.com, “Those who took the teaser loan will see their loan shift from around 8% fixed in 2009 to around 12% floating at current rates. Many borrowers may look to shift lenders offering better deals. This (SBI) move is to prevent the exodus of teaser loan borrowers."
SBI borrower or not, if you are still on the BPLR regime or are set to float after enjoying the fixed rate for the initial few years, switching your loan at this point may make sense with many banks offering competitive rates.
Why does switching make sense now?
There is a good possibility that the rate of interest you pay as of now is around 12.75% per annum, plus minus 50-75 bps.
Says Harsh Roongta, CEO, Apnapaisa.com, a loan portal, “If you are currently paying a rate of interest above 10.75% per annum, it absolutely makes sense to switch the loan to another lender, irrespective of the loan amount. Especially now when lenders don’t charge a prepayment fee while switching a floating rate loan. If you are getting better rates, elsewhere, there is no point continuing at higher rates. There are (BPLR) borrowers who are still paying above 14% per annum."
Competitive rates: Many banks are offering competitive rates as of now. Says Vipul Patel, director, Home Loan Advisors, an independent mortgage advisory firm, “The rates offered across banking is in the range of 10.50-10.75% for loans below ₹ 30 lakh and 10.75-11.25% for loans above ₹ 30 lakh."
Last week, IDBI Bank Ltd reduced its home loan interest rates by 75 bps, with new rates being in the range of 10.75-11.50% per annum. Canara Bank also reduced its rates for new borrowers by 175 bps recently.
SBI offer: While it’s best to shift to a lender offering a lower rate, if you want to continue with the bank, it’s better to take the offer even after paying the conversion fee. If you want to continue with your lender as a borrower, see what rate you can negotiate also try and negotiate for a lower conversion fee if your lender charges any.
What should you do?
Look at the cost: While switching, remember to take into account the total cost of the old loan and the new loan. Shetty says, “While switching the loan take into account the cost of switching. Interest rate is an important parameter. Also the processing charges of the new lender is to be taken into account."
There are lenders that charge a fixed processing fee of ₹ 5,000-10,000 and switching may work in such cases.
The existing lender would not want to let go of a good borrower, while the new lender would be open to negotiate the fees. Roongta says, “If you’ve been a good borrower, there is a good possibility that the new lender could waive the processing fee of your loan totally, and the switching would then be at zero cost."
Should you wait for rate cuts? While everyone expects rates to start falling soon, no one can tell exactly when that would happen for sure. Roongta says, “Why should you wait for rates to fall and pay more till then. Even if you switch now and rates fall later, you will get the advantage of the fallen rate later."
To stick to your existing lender or ditch it for a new is your call because you will need to do detailed paperwork once again. If you do decide to change, we recommend shop around, negotiate hard on rates and fees before making that switch.
bindisha.s@livemint.com
Also See | Current rates (PDF)
Illustration by Shyamal Banerjee and graphic by Yogesh Kumar/Mint
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