A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit of lower interest rates prevalent in the market. Usually the existing borrower of a bank, who is about two or more years into his loan tenure, does not get the benefit of falling interest rates in the market. The Reserve Bank of India has been insisting on lower interest benefits to be passed on to the existing borrowers as well, but this seldom happens.
Such individuals 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 a bank that offers a lower interest rate.
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, and 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 was earlier levied by the existing lender, which can vary between 2 per cent and 5 per cent of the principal outstanding of the loan at the time of refinance. However, recently NHBs and some banks like ICICI Bank and State Bank of India have waived this fee, but some banks could still be charging a penalty. Do check with your bank and try to negotiate a waiver as the RBI and the NHB mandates clearly are not in favour of a penalty for prepayment in the case of a floating interest rate loan.
Also, remember that you will also need to pay a processing fee to the new lender, which could also be negotiated and waived in this high-interest-rate regime.
This can range anywhere between 0.5 per cent and 1 per cent of the loan applied. Most banks restrict this amount to Rs 5,000.
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.
The current interest rate climate however looks unfavourable for a switch unless you want to do it for other reasons. Starting this new year all major banks have increased their interest rates by 0.25-0.75 per cent.
More hikes are expected after RBI's monetary policy review tomorrow.
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 does not agree 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, but your bank may not be ready for this.
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 financial 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.
Get a statement 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.
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