Many may seek a home loan transfer to benefit from lower interest rates. Given that most banks in India currently offer home loans at an average interest rate of 10.25 % (floating rate of interest), anyone paying more than this amount and still having 12 to 13 years outstanding on the loan should definitely consider a transfer.
However, the reality may be a little more complex. Every time the rate of interest falls, homeowners can’t leap for a loan transfer.Here are some things to know before planning to transfer a home loan or getting it refinanced:
1. Transfer to another bank Vs negotiation existing bank:
Many people complain that banks are quick at hiking interest rates (floating), but seldom inclined to reduce them when the rates soften. Banks may not always allow new borrowers – who are about 3-4 years into the bank tenure – to reap benefits from lower rate of interest or agree upon negotiating other loan terms. However, if you have a good credit history and the ability to pay EMIs (Equated Monthly Installments) on time, you can make the most of it and approach another bank for home loan refinancing.
2. Know the rate of interest:
Before transfer, you should carefully research about the rate of interest being offered by different banks. The rates are readily available on bank websites. This can help you identify the best deal. Some financial experts prefer that there should be a difference of at least 175 base points or 1.75% for a deal to be good. Others hold the opinion that since the home loan is a long term debt, even a difference of 0.5% will be beneficial in the long run.
3. Fees and penalties:
In recent times, many banks like ICICI and State Bank of India have completely waived off any penalty on loan transfers, but some banks still charge borrowers who want to discontinue with their services. This is called pre-payment penalty. Banks typically charge around 2% penalty on the outstanding loan balance. This amount could turn out to be significant in case of a huge balance. Borrowers also have an option to get this amount financed by the new bank.
In addition, the new bank will also charge a processing fee for its refinancing services. Most banks and house financing companies charge 0.5% of the loan amount as processing fee. Some of them may charge a flat fee, which is usually restricted up to Rs 5,000.
4. Cost-benefit analysis:
Loan transfer will only make sense if the net savings over the entire tenure of the loan are greater (and more significant) than the expenses incurred in a transfer. Put simply, a transfer is beneficial when the net savings on outgoing interest is more than the total penalty and processing fee.
5. Right time for a shift:
Every EMI payment you make has an interest and a principal component. This means, part of the money is the interest, while the remaining is to repay the principal sum the bank loaned to you. As a thumb rule, in the beginning of the loan term, borrowers pay a higher amount towards interest payment; towards the end, they pay higher towards the principal repayment. This is why, it is better when you switch the loan during its initial years.
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