Anita Garg is bank-hopping these days. She recently took leave for two days to sort out a matter regarding her home loan. No, she is not applying for a new loan; neither is there a trouble with her bank. The process of scanning interest rates offered by other banks began when she came across an advertisement last month about a bank that was offering home loans at 9.5 per cent interest rate.
Garg’s existing home loan with a public sector bank was taken at 11 per cent per annum. The monthly outgo of Rs.31,314 was hurting her, especially because she was not able to invest more. She did a quick calculation and found that moving to the new bank would help her save at least 06,000 every month.
Interestingly, her existing bank, too, had reduced home loan rates, but only for new customers. For old borrowers like Garg, the bank had converted the reduced rate into reduced tenure, without even communicating the matter to her. But, for her, what mattered now was the instalment, which she now had an option to bring down.
Transferring home loan to a bank offering a better rate is the right of every customer. In a falling rate environment, where banks are competing to offer attractive home loan rates, it does not make sense to miss the opportunity. The Reserve Bank of India slashed rates by 125 basis points in 2015, and more rate cuts are expected this year. Banks will have to pass on these cuts to customers.
By doing just a few things, the loan transfer process can become very easy for anyone. First, look at interest rates offered by other banks. Get quotes from as many banks as possible. The most important thing to do before moving a home loan is cost-benefit analysis. “Just comparing interest rates alone will not help. A proper calculation needs to be done on the difference it is going to make in your EMI, including processing charges and time and effort involved. Assess whether it is worth taking that hassle,” says Lovaii Navlakhi, founder of International Money Matters Private Limited, a personal finance advisory firm.
If the difference is substantial, do not hesitate to take the step forward. In general, it makes sense to shift in the initial years of a home loan, if interest charged by your bank is higher than the market rate. “This is because the interest component in a home loan is always high in the first few years. It makes sense to bring down the interest cost; the principal amount, anyway, kicks in later,” says Rishi Mehra, cofounder of Deal4Loans, a loan information and application portal.
Also, take into account processing charges that you need to shell out. Processing charges are not standard. Banks charge anywhere between 0.5 to 1 per cent of the outstanding loan amount, or a flat fee of Rs.5,000. “They vary for different types of customers, depending on their credit history or relationship with the bank. You can always negotiate processing charges with the bank,” says Navlakhi.
There are instances where customers have to sometimes seek loan from housing finance companies (HFCs) at high rates. This might be because the property under construction is not recognised by a public sector bank. Once possession is taken and there is a track record of the customer with the HFC, the public sector bank might sanction a loan for the same. “In such cases, it is absolutely necessary to get your home loan refinanced. You should always hop from a bad bank to a good bank,” says Mehra.
One thing that can help borrowers is prepaying your loan with lump sum amounts as and when possible, say experts. This will keep reduce the loan burden. Mehra advises to keep an eye on the ‘rate cut’ behaviour of different banks post RBI moves. An analysis can give you an idea on which banks are fast in transmission and which are slow.
Before starting the loan transfer process, it is also advisable to check with one’s bank if they can offer the reduced interest rate applicable to new customers. The bank would charge a conversion fee, after which the loan would get readjusted under a new interest rate. If the bank agrees, it would be the best option, as it can save both time and energy in shifting the home loan from one bank to another.
Once you have made up your mind to transfer the loan, the first thing you need to do is to approach the current bank and get a no-objection certificate for the loan transfer and other documents to show account balance and payment history. On completion of this documentation process, the new lender will sanction the loan amount to the old lender for closing the loan. Finally, all home-related documents are transferred to the new institution. “The key criteria that we look for in a loan-switching application is repayment track record. We do a complete credit assessment and treat it like a new loan,” says Harshil Mehta, chief executive officer of Dewan Housing Finance Limited.
If you are a loan hopper (one who shifts from one bank to another frequently) banks might take note of you as an unstable customer. Mehta advises to check the exit clause in your loan application before shifting the loan. Some banks do have restrictive clauses that prevent you from moving to another loan provider for a certain period.
Besides, you might not even need to transfer loans once the RBI’s new rules on pricing loans kick in. The marginal cost of funds-based lending rate (MCLR), applicable from April 1, is expected to make the rate transmission mechanism more transparent. “MCLR is a great step by the RBI,” says Adhil Shetty, chief executive officer of BankBazaar.com. “The need to switch loans will go down further once it comes.”