Things To Consider Before Deciding To Transfer Your Home Loan To Another Lender
As interest rates on Home loan declined, many existing borrowers are considering switching to another lender. Back-of-the-envelope calculations show that even a 0.5% difference can result in significant savings if the remaining tenure is 10 years or more.
Interest in switching to another lender has increased as some banks offer low interest rates for transferring the funds. “With lenders like Kotak Mahindra Bank announcing a 6.75% interest rate on home loans, the number of inquiries is increasing. Even axle bench and ICICI bank are offering some discounts for those who want to switch to them, “said Aditya Mishra, CEO of Switchme.in, a home loan transfer platform.
However, it is important to check that the transfer of your home loan will actually result in savings for you. Here are the few things to consider before committing to a mortgage transfer.
Consider someone who has a home loan outstanding ₹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 payment drops for the term of the loan ₹30.89 lakh. The borrower will save in the end ₹2.54 lakh or could shorten the tenure by about 10 months.
However, there are some costs involved in transferring your home loan balance. The most important fees include stamp duty and the handling fee. Some lenders also charge documentation, legal, evaluation, and technical fees. Stamp duty fees vary from one state to another. For example, in Mumbai it is 0.25% of the loan amount and in Delhi it is a flat rate of Rs 100.
Consider all of these costs before calculating your savings minus fees. For a ₹50 lakh loan, it can be as high as ₹24,100. Some lenders may also force you to take out life and home insurance, which will further add to your costs.
“The cost of taking out an existing loan and switching to a new one can affect your savings. Even if the interest rate is a little lower than your existing loan, you could end up paying more if the evaluation fee, processing fee, and other fees for the new loan are substantial, ”said Adhil Shetty, Co-Founder and CEO of BankBazaar, an online Marketplace for financial products.
WHEN TO SWITCH
Aside from the cost, there are other things a borrower needs to consider before answering a call on the move. If you have an ongoing loan from a bank, check to see if the interest rates are pegged to an external benchmark or to the marginal cost of the fund-based lending rate (MCLR).
If the loan is on MCLR, you can get a lower interest rate by switching to interest rates that are pegged to an external benchmark. Since October 1 of last year, the Reserve Bank of India has asked banks to peg all of their new floating rate retail loans to an external benchmark. It helps borrowers understand when their interest rates will rise or fall depending on the change in the external benchmark, which for most banks is the repo rate.
If you work for a non-bank financial firm (NBFC), it would make sense to switch to a bank. The external benchmark only applies to banks. The interest rate movements of NBFCs are still not transparent.
Experts from the banking industry said it makes sense to switch if your existing tenure is more than 10 years. Because in the early years of the loan, a large part of the equivalent monthly rate consists of the interest.
As a rule of thumb, a borrower should consider reallocating the home loan if the remaining term is more than 15 years and they are getting a loan 25 basis points (bps) cheaper than their previous lender. A bps is one hundredth of a percentage point
People with a remaining term of between 10 and 15 years should only consider switching if the interest rate differential is more than 50 basis points. If a person has less than 10 years left on the loan, the borrower will need to assess whether there will be savings on switching.
Switching may look attractive, but you need to weigh the savings beforehand.
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