The huge rush in bank deposits due to demonetization has lead to banks reducing lending rates to the lowest in the last 6 to 8 years. Leading the pack, is SBI which has reduced its home loan rates by 50 basis points (bps) to as low as 8.5 per cent (fixed). Even, HDFC, the largest NBFC in the home loan segment, has reduced its home loan rates by 45 bps. However, as the rate cuts will mainly benefit fresh borrowers, many existing home loan borrowers would be allowing for a home loan balance switch to make the most of the low interest rates. Read more about SBI home loan service in India.
Here are some factors that would help you decide whether you should decide on for a home loan balance transfer now:
Savings on interest payouts: For most people, savings is the main reason for switching their home loans. However, decide on for a home loan balance transfer only if the total savings in interest payout is significantly higher than the cost incurred while switching the loan.
Remember that the earlier you transfer your home loan, the higher will be your savings in your interest payout.
For example, assume that you have Rs 50 lakh home loan of 20 year tenure @ 9.1 per cent with just 3 year left to pay. If you switch it to a lender offering @ 8.6 per cent interest rate, your total savings in EMIs will be Rs 11,901 only. However, if someone switches the same loan amount of same tenure at same interest but with 15 years left to pay, he will save Rs 2, 36,748 on his interest payout. Therefore, avoid loan transfer when your loan is in the last leg of its tenure.
Switching to MCLR-based loans: Currently, only banks provide MCLR-linked loans. Compared to RPLR and base rate system, MCLR rule has a more transparent rate-setting mechanism. The probability of policy rate transmission is also higher with the MCLR rule. Although, RBI has directed banks to allow their base rate borrowers to transfer to the MCLR system, housing finance companies (HFCs) and other NBFCs do not come under the purview of MCLR. Therefore, transfer your home loan to a commercial bank if the difference between your existing rate of your NBFC loan and the rates offered by banks is significant. Switching to MCLR will increase your chance of benefiting from future rate cuts.
Non-approval of top-up loans: Banks and NBFCs offer top-up loans to their existing home loan borrowers when they need funds over and above their existing loan. These loans are alike to personal loans and the loan amount can be used for any purpose — like refurbish your home, medical operating expense or even for purchasing consumer durables. Their interest rates are also usually lower than that of the personal loans. Transfer your existing home loan if your current lender is not approving a top-up loan or charging a higher interest on the top-up loan. Read more about Top-up home loan in India.
Renegotiation of terms and condition: Transferring your home loan to a new lender is like to taking a fresh loan, where the new lender will have its individual set of terms and conditions. You can use it to re-set your loan EMI and tenure and top up as well. Choose for a home loan transfer if your existing lender is not allowing you to reset the terms and conditions of your loan.
Currently, home loan balance transfers will be especially beneficial for those who have a long tenure left for loan repayment. As there is scope for further policy rate cuts in near future, borrowers under the base rate system should either switch their loans to MCLR rule or transfer to a bank offering better rates at better terms and conditions. Home loan borrowers from housing finance companies can also think to transfer their balance to commercial banks as that will take them under the purview of MCLR rule.
Calculate all the factors: Before switching your home loan you should always calculate all the factors. You should calculate all the offers and the savings. If the new lender is going to give you 0.50% lower rate of interest on your existing loan it is good idea to switch the loan if you are not paying a lot on the loan transfer fee and other things.
Compare different offers: While choosing the new lender always compare different offers. Don’t just take the first offer made by any bank. Try to get the new loan information from at least two or three different banks. It will help you in getting the best contract in home loan transfer. Always compare the rates, terms and conditions of the new lender before switching your home loan.
Home loan transfer cost: This is another thing which you should consider before transferring your loan. Always calculate the loan transfer cost. What will be the processing fee and loan transfer fee and charges? While calculating your benefits you should always deduct the fee and charges you are going to pay in home loan transfer. After deducting this loan transfer charges and fee from the amount you will save because of new lending rates you will be capable to find out your savings. So, it is important to calculate all the things in advance.
So, these are some points—
- Savings on interest payouts
- Switching to MCLR-based loans
- Non-approval of top-up loans
- Renegotiation of terms and condition
- Calculate all the factors
- Compare different offers
- Home loan transfer cost
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