Things to remember before you decide to shift your home loan to another lender3 min read . Updated: 25 Nov 2020, 07:29 AM IST
It’s important to evaluate whether transferring your home loan balance will actually result in savings for you
As interest rates on home loans have been on the decline, many existing borrowers are looking at shifting to another lender. Back-of-the-envelope calculations show that even a difference of 0.5% can result in substantial savings if the remaining tenure is 10 years or more.
The interest in shifting to another lender has gone up as some banks are offering low rates on balance transfer. “Since lenders such as Kotak Mahindra Bank advertised 6.75% rate on home loan, the number of queries is on the rise. Even Axis Bank and ICICI Bank are offering some discounts to those who want to shift to them," said Aditya Mishra, CEO, Switchme.in, a home loan balance transfer platform.
However, it’s important to evaluate whether transferring your home loan will actually result in savings for you. Here are the few things that you should keep in mind before opting for a home loan balance transfer.
Consider someone who has an outstanding home loan of ₹50 lakh at an interest rate of 7.5% ,and the remaining tenure is 15 years. The borrower would end up paying ₹33.43 lakh as interest. If another lender offers an interest rate of 7%, the interest rate payment for the loan tenure will fall to ₹30.89 lakh. The borrower will end up saving ₹2.54 lakh or would be able to reduce the tenure by around 10 months.
However, there are some costs attached when you transfer your home loan balance. Among the major charges, there’s stamp duty and processing fee. Some lenders also charge documentation, legal, valuation and technical fee. Stamp duty charges vary from one state to another. For instance, in Mumbai, it’s 0.25% of the loan amount and in Delhi, it’s a flat Rs100.
Take all such costs into account before calculating your savings, net of charges. For a ₹50 lakh loan, it can be as high as ₹24,100. Some lenders may also force you to take life and home insurance, increasing your cost further.
“Charges involved in closing an existing loan and moving to a new one can have an impact on your savings. Even if the rate of interest is slightly lower than your existing loan, you might end up paying more if the valuation fee, processing fee, and other charges are sizeable on the new loan," said Adhil Shetty, co-founder and CEO of BankBazaar, an online marketplace for financial products.
WHEN TO SHIFT
Besides costs, there are other things that a borrower needs to consider before taking a call on shifting. If you have an ongoing loan from a bank, check whether rates are linked to an external benchmark or to the marginal cost of funds-based lending rate (MCLR).
If the loan is on MCLR, you could get a lower rate when you shift to rates that are linked to an external benchmark. From 1 October last year, the Reserve Bank of India has asked banks to link all their new floating rate retail loans to an external benchmark. It helps borrowers to understand when their rates will rise and fall, depending on the change in the external benchmark, which is repo rate for most banks.
If you are with a non-banking financial company (NBFC), it would make sense to shift to a bank. The external benchmark is applicable only to banks. The interest rate movement of NBFCs are still not transparent.
Banking industry experts said it makes sense to switch if your existing tenure if over 10 years. This is because in the initial years of the loan, a large part of the equated monthly instalment comprises the interest.
As a rule of thumb, a borrower should look at shifting the home loan if the remaining tenure is above 15 years and he’s getting a loan cheaper by 25 basis points (bps) than what his existing lender is offering. One bps is one-hundredth of a percentage point
For those with a remaining tenure between 10 and 15 years should look at switching only if the interest rate difference is above 50 bps. If an individual has less than 10 years remaining for the loan, then the borrower needs to estimate if there will be any savings on switching.
Switching may look attractive but you need to evaluate the savings before doing so.