Home / Money / Personal Finance /  Rate hikes are here. Should you switch your home loan now?

Has your home loan interest rate become expensive by 10-30 basis points, or bps (one bps is one-hundredth of a percentage point) in the last few weeks? This is a result of the recent 40 bps repo rate hike by the Reserve Bank of India (RBI). The revised repo rate stands at 4.40% currently. Are you considering switching to a lender offering cheaper rates? Experts caution against this move.

Rates are expected to be hiked further and it’s a matter of time before all lenders increase their interest rates on repo rate linked loans. Borrowers should wait and watch for a few months before taking a decision. More importantly, switching would make sense only if you’re getting a rate lower by atleast 40-50 bps,“ said Amit Suri, a Delhi-based financial planner. 

Raj Khosla, founder and MD, MyMoneyMantra.com, said, “Borrowers tend to shop around and possibly switch lenders after a rate hike as they can take advantage of a potentially lower rate of interest. Depending on the rate differential, savings can be significant for a borrower. Fro instance, for a 20-year home loan of 75 lakh, a rate differential of 0.5% can result in a saving of 5.5 lakh."

The remaining loan tenure is also another major factor to decide whether switching makes any sense. 

If you only have 1-2 years left to pay back the loan, carry a cost analysis of what you will save vis-a-vis the charges you will pay in switching. 

Moving to another lender attracts a processing fee of 0-1% of the loan amount or a flat fee of 3,000-11,000. Some lenders may even charge a conversion fee of 0.25-0.75% of the outstanding principal or a flat fee, which is typically capped at 50,000. 

Other key miscellaneous charges include stamp duty and fees paid to technical valuers or advocates.

Customers also need to check whether the new lender can levy pre-payment charges or not, in case you wish to close your loan early. 

Borrowers with high creditworthiness stand a chance to bargain a lower price with their current lender before they go looking at other lenders, as per Khosla. 

“It is advisable for a customer to approach their existing lender for a re-pricing of the existing loan. Lenders tend to match competition pricing, especially for good quality borrowers."

Khosla, however, said that a slightly lower rate should not be the primary reason to opt for a switch, particularly if the lender is a good service provider.  “Since a home loan is typically a long-term association, borrowers should additionally assess the quality of service before finally deciding to switch lenders."

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