Usually, the existing borrower of a bank who is about two or more years into his loan tenure does not get the benefit of reducing interest rates.
The Reserve Bank of India 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. However, this will happen in the long term for borrowers who took a loan post the introduction of the base rate system. 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.
You will also need to pay a processing fee to the new lender. This can range anywhere between 0.5 per cent and 1 per cent of the loan applied.
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.
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. 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:
The bank does not agree to change loan terms: You might want to renegotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, and your bank might not be ready for this change.
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 fresh 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.
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.