A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market.
Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens but is expected to become a reality in the base rate regime. Individuals looking for better interest rates could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.
How does the process work
You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.
The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.
A prepayment penalty will be levied by your existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. SBI recently has done away with prepayment penalty charges, it remains to be seen if other banks will follow suit!
Also, remember that you will also need to pay a processing fee to the new lender.
This can range anywhere between 0.5% and 1% of the loan applied, most banks restrict this amount to Rs.5000.
Another important aspect is the timing of your loan switch. If you are planning to switch your loan after most of your interest has been repaid, it will not make money sense as you will be shelling out more with the switch!
Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.
Recently SBI hiked its base rate by 0.25%. More hikes are expected from other banks soon. SBI has also withdrawn its teaser loan schemes from the market. On the positive side as mentioned earlier it has also dropped prepayment penalty charges in line with RBI expectations. If your bank (if it's not SBI that is) also decides to drop prepayment penalty charges, it will augur well for you! Hence it would be in the borrower's best interest to wait it out till rates stabilise to choose an ideal deal for a switch.
Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank etc. and a loan will be approved only when conditions are met.
Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:
Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.
Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.
Service issues: Sometimes you might just be unhappy with your bank's service and accessibility, which might prompt a change.
Things to watch out for:
It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.
In the recent past a loan transfer was the most sought after when teaser loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.
Get statements from your current lender stating that property documents will be dispatched within a certain time frame to avoid hassles on this front.
Remember that a loan switch will not be possible if you have been irregular with your loan repayment with your current lender
Keep in Mind : for A New or Transfer of Home Loan
1. Take fixed interest rate & for the maximum fixed rate period
2. Do not take more than 15 years loan
3. Try to save every penny of your salary to do partial preclosure of your home loan
4. If you repay 1,00,000 in addition to the emi, you can save approximately 10,000 interest next year.
5. Never reduce EMI on partial preclosure, but reduce the term. In this way, your principal repayment will increase every month, thereby interest will reduce substantially.
6. Use your mind and calculator every month to do your loan calculations. If you get a loan, and just forget it by subscribing to ECS, banks will rip you off.