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Is this a good time to shift your home loan to another bank?

Often, new loan customers get better deals than existing ones.
Often, new loan customers get better deals than existing ones.

Summary

If you have several years of EMIs left to pay, the savings on interest costs can be worth it.

Are you tempted by the concessional home loan rates being offered by some banks as part of their ongoing special offers? If you are one of those borrowers who have taken a longer duration home loan at a relatively higher interest rate, you may now be tempted to switch your existing lender (bank or NBFC) and benefit from lower equated monthly instalments (EMIs).

However, the question facing most customers is, should you do so now? And, what factors should you consider before you go down this path? Do note that some banks are already providing home loans at lower rates, irrespective of the special offers, and the EMIs could be lower than what you pay now.

Graphic: Mint
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Graphic: Mint

Vishal Dhawan, founder & CEO of Plan Ahead Wealth Advisors, says, “Very often, new loan customers get better deals than existing ones. So, it (home loan transfer) is something absolutely worth looking at."

But as always, remember to read the fine print.

Terms and conditions apply

First of all, not all home loan applicants—whether taking a fresh loan or transferring an existing loan from another lender—are likely to get the best interest rate offered by a bank. As with your existing bank, the rate offered by the new lender is also governed by several factors such as your credit score, and whether you are a salaried or a self-employed person, etc.

For example, under an ongoing offer, SBI is offering an interest rate of 8.75% to home loan transfer applicants with a credit score of 750 or higher. The interest rate on loans for those with a credit score of 700-749 will be 8.90%. The bank has waived off the processing fee. ICICI Bank’s offer covers only those with a credit score of 750 and above, as per its website. For instance, those with a credit score of 750 to 800 will be charged a rate of 8.75% (salaried) and 8.85% (self-employed). These offers are on until January 31.

What to consider?

There are several factors for you to consider, the obvious one being the interest rate differential. You can get a rough figure on your cost savings from a balance transfer calculator (see graphic). These go by the name of takeover EMI or refinance calculator. However, this figure doesn’t account for future changes in your home loan rate. You can compare this cost saving with the one-time expenses that you will incur at the time of transfer.

What are these one-time costs? One, you will have to pay a processing fee (usually up to 0.5% of your loan amount subject to an upper limit, but can be higher) to the bank to which the loan is being transferred. This may be waived off in some cases. Two, there is an MOD (memorandum of deposit) charge that has to be paid to the bank. This is typically around 0.25% of your loan amount, and ensures that the bank has rights over the property in case of a loan default.

What about expenses to be paid to your original lender? There are none in case of a floating rate loan. “Whether you refinance with a new bank or your existing bank, it’s like a pre-payment. You are moving from one loan contract, pre-paying it, and moving to a fresh contract. And, as per RBI regulations, there can be no pre-payment charge on a floating rate loan," explains Shetty.

That apart, there are other factors. Mint reached out to a few people who have either opted for a home loan transfer or evaluated its possibility. Take the case of Garima Bhatnagar, an assistant vice-president at a multinational bank. She has decided against transferring her home loan despite a 50-60 basis point interest rate reduction. She has a home loan insurance policy with her existing lender and switching to another lender would have meant two things: one, paying around 1.25 lakh as premium (50% of it would be refunded later) for the transfer to be approved, and two, losing the existing insurance cover she had. For Chennai-based Babu Sathyanarayanan, liquidity risk manager at HSBC, switching banks would have entailed payment of MOD charges once again. Given this, and the fact that he intended to close his loan much before its actual tenure made him stay put. The flexibility of more frequent pre-payments at his existing lender was yet another deciding factor.

Dhawan feels that apart from the costs involved, one must factor in the time commitment in the process. “A home loan is ultimately a secured loan. So, the due diligence around the property and most other things that you went through when you first took the loan will still have to be repeated." Shetty concurs with this. “When you apply to a new bank, it is almost as if you are a new borrower. The new lender will run a complete new set of underwriting checks before approving your loan, and this can take up to three weeks depending on that bank’s processes" (see graphic). He adds further, “One needs to get a no objection certificate from the existing lender and engage with them to be able to furnish documents required by the new lender."

According to Suresh Sadagopan, principal officer, Ladder7 Wealth Planners, if you plan to pre-pay your loan on an accelerated basis, then switching to another bank may be less relevant. He suggests an easier alternative: exploring the option of a lower rate with your current lender.

Stay with the current lender

“Your credit score can play a very important role when it comes to negotiating a lower rate with your existing lender," says Shetty. The process itself can be quicker, and you don’t have to pay MOD charges again. “You have to apply for refinance, and pay a small processing fee. But there is no verification of land documents and other legal checks as these have already been done," adds Shetty.

You may be charged say, 0.25% or 0.50% of the outstanding loan amount, which may be subject to an upper limit for moving to a lower rate at your existing bank itself. However, most bank websites do not provide details on the extent of rate cut, and whether there are any limits to the number of times you can opt for this. Further, not every bank may facilitate a shift to a lower rate (where both are floating rate loans), and may only permit a shift from a fixed rate to a floating rate regime.

When asked whether refinancing with the existing bank is likely to fetch you only a small reduction in rate compared to when you shift to another bank, Shetty says it could work either way. “Personally, I found that my existing lender was offering me the best deal. But in certain cases, I have seen people transfer to a new bank." There are others who, however, feel that your existing lender may provide only a small cut.

Should you switch today?

According to Dhawan, one very important point to think about is whether one is close to the peak of an interest rate cycle at the time of transfer. That’s because, if rates continue to rise further, then a few months down the line, the borrowers may feel that they are not getting the best deal in the market. “During the course of this quarter, we could possibly see interest rates coming somewhere close to the peak. So, today is probably a good time to go ahead with this," says Dhawan. Shetty says, “We tell people to make their assessment based on what they know today. All else being equal, if refinancing at the prevailing rates will help you save a significant amount of money, then consider going for it."

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