Check if a home loan switch works for you

If you have an ongoing loan with a tenure of over 10 years, a difference of even 50 basis points (bps) can result in substantial savings. Take the example of a borrower who has an outstanding loan of ₹50 lakh at an interest rate of 7.4% and the remaining tenure is 15 years. If another lender offers him 50 bps lower interest rates, he will save about ₹2.53 lakh in interest outgo (see graph). One bps is one-hundredth of a percentage point. Remember to account for the applicable fees and stamp duty charges.

But the process to switch your loan balance can be challenging and time-consuming. We tell you how it works and the challenges you could face in doing so.

Switching process

When switching lenders, the borrower has to first approach the financial institution where the loan will be transferred. The new lender evaluates the application and offers a sanction letter. This process can take up to two weeks. If you go through an intermediary, it may be faster.

To further process the transfer request, the new lender requires copies of the list of documents (LOD) and loan account statements. Banks and non-banking financial companies (NBFCs), typically, take two to four weeks to process such requests. Some lenders process such requests only once a month.

It’s best to apply for the foreclosure letter at this stage itself (though you can submit it anytime before the issuance of the final cheque) as lenders take time to issue this. Some lenders have retention teams that first try to persuade the customer to continue. A foreclosure letter states the amount required to close the loan.

Once the new lender receives the first set of documents, it asks for other property-related documents such as a copy of the registered agreement. The second set of documents is required to initiate the legal and valuation process, which can take up to two weeks before the final sanction and agreement. After going through this process, the new lender issues a cheque in the name of the existing lender.

Once it gets the cheque, the old lender closes the loan and after two weeks, hands over the original documents to the customer for submission to the new lender.

Current challenges

Doing a balance transfer in the current scenario, however, can be slightly challenging. As banks and NBFCs continue to work with limited staff, the processing of many such requests has become slow.

Home loan transfers have virtually come to a standstill since the lockdown started. “We have received applications from many borrowers who want to do a balance transfer. The banks who would take on these loans have also offered a sanction letter. But the transactions are indefinitely stuck as the existing lender, the one where the borrower has an ongoing home loan, is not processing the required documents," said Aditya Mishra, founder and CEO, Switchme.in, a platform that helps borrowers shift their home loans.

Between March and June, not even a single transaction happened through the platform. A few lenders, where borrowers have an ongoing loan, started processing the requests in July. However, all eligible borrowers on the platform have received sanction letters and are waiting for their lenders to initiate the transfer procedure.

“Things are stuck at the stage where the borrower has to get the first set of documents. As the financial institutions know that they would lose a customer, they are going easy on processing such requests. As some state governments have allowed offices to operate with only 10% of their regular staff, lenders are pointing towards the limited staff availability for not being able to process such applications," said Mishra.

The problem is more prominent in major metros. “Balance transfer is happening in some centres but taking much longer in metros. Some of the largest lenders in the country have not been processing any application," said Gaurav Gupta, CEO, Myloancare, a marketplace for loans and credit cards.

According to people familiar with the industry, many private lenders were facing a shortage of field-work staff due to which they were not processing any loan-related requests until June-end. “Many of the field staff comes from tier-II and tier-III cities. They rely on public transport for their work. Due to the lockdown, many went back to their hometowns. Those who are available have to use private vehicles to attend calls. Due to such challenges, lenders have been slow to process loan applications and other requests," said Pankaj Bansal, vice-president and head, key account management, Bankbazaar, a marketplace for financial products.

Thing to Remember

As there are fees and charges involved, it makes sense to shift only if there is a difference of at least 50 bps between the new and the old lender. “While switching is case-specific, the difference should be at least 50-75 bps. As a thumb rule, if the tenure is below 10 years, the difference should be 75 bps, and if it’s more, it should be 50 bps," said Gupta.

Also, the stamp duty charges (on the mortgage document with the new lender) can make a considerable difference in cost that a borrower will incur while switching, in some states, added Gupta. According to him, states like Andhra Pradesh and Telangana charge 0.5% (of the loan amount) in stamp duty, Maharashtra has 0.2%, and Delhi, Uttar Pradesh and Haryana charge a small flat fee (in a few hundreds). Also, while PSBs may have a discount on processing fee, their legal and technical fee are higher than what private lenders charge.

While switching lenders could be a lengthy process in the current environment, those who are currently on marginal cost of funds-based lending rate (MCLR) should look at switching to repo-based loan. “If your home loan MCLR is not due to reset any time soon, it’s best to switch from MCLR to repo rate with the same lender. It’s not just about cost. Switching to external benchmark brings in more transparency in the interest rate movement," said Bansal.

When you decide to switch, keep the processing time in mind, and use an online calculator to understand the savings after deduction of different charges.