Although the Reserve Bank of India (RBI) did not cut interest rates in its last monetary policy review, banks have already started dropping deposit rates for the tenure of one year. This is an indication that lending rate cuts will also follow soon. If you think lower home loan rates with other banks would provide you the opportunity to lower you interest burden, you should rethink.
Although the Reserve Bank of India (RBI) did not cut interest rates in its last monetary policy review, banks have already started dropping deposit rates for the tenure of one year. This is an indication that lending rate cuts will also follow soon. If you think lower home loan rates with other banks would provide you the opportunity to lower you interest burden, you should rethink.
In the recent past, wholesale and consumer inflation has cooled off but EMI inflation has refused to budge. This is because the RBI is still in a wait-and-watch mode before slashing interest rates.
However, with inflation under control, the rate cuts will happen sooner or later and banks too would pass on the benefit to new customers. But if you already have taken a home loan, switching to a lower rate may seem enticing.
Here are a few things you should keep in mind before you make such a move:
1. Do cost benefit analysis
It is important that you carry out a thorough cost benefit analysis before making your home loan switch. It's the interest portion that pinches the pocket. Therefore, your aim should be to save as much as possible on the interest payable to the bank. Ideally, you should not make a switch unless the rate cut is at least 0.75-1.00 per cent.
Lower the tenure, higher should be the rate cut and vice-versa. So for instance your remaining balance tenure is less than five years, the difference in the new and existing rate should be at least 1 per cent. On the other hand, if the outstanding tenure of your loan is around 10 years, don't settle for anything lower than 0.75 per cent. In case of longer tenures, a small rate cut can have a major impact. In case the balance tenure is as long as 15-20 years, you can save a lot of money even on a rate cut of 25 to 50 basis points (0.25-0.50 per cent). However, these are thumb rules and you should do your own calculation.
2. Explore the option of internal switch
Before deciding to move to other bank for a lower interest rate on your home loan, it is always prudent to check with your own bank if it is willing to offer the same. Most banks do not want to lose an existing customer. Instead, they might shift you to a lower rate they are offering to their new customers. In most cases, your bank would charge a conversion fee ranging from 0.5 to 1 per cent of the outstanding amount. Another advantage of negotiating with your existing lender is that you would save on time and paperwork. The new lender would go for your credit evaluation and verification of the property as well as in case of a new customer. Besides, you have to shell out legal fees and stamp duty even if the processing fee gets waived off. All these charges would add on to your cost that you must factor in.
3. Consider new bank's terms & conditions
Shifting your loan to a new bank is not an easy ride. The lender would consider a host of factors before disbursing you the loan. One of them is your repayment record with the previous lender. If you have defaulted few times or simply delayed paying your EMIs, your request could be turned down. In case of loan for the property under construction, your new lender might not consider giving you loan if the construction on your home is running behind schedule.
All the above factors are important and must be considered before shifting a home loan to another lender.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
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