You can approach a new lender with the demand for more money or for a longer term or both.
The mail hits your inbox announcing the interest rate hike on your home loan. That is a sad news, especially when festive season is around. Many a times, borrowers find it difficult to pay the increased amount of EMI (equated monthly instalment) and hence, look for reducing the rate of interest by transferring their loan to some other lender. If you, too, are contemplating switching your home loan to a new lender, here are a few factors you should consider.
Do not get worked up with a rate hike on your home loan. Ascertain exact amount of rise in your home loan EMI. Also, do not jump to the first offer you get.
“As a rule of thumb, if more than 75% of your loan repayment tenure is pending and the difference between existing rate of interest and the prospective rate of interest exceeds 75 basis points, then it makes sense to go for a balance transfer,” says Suresh Sadagopan, founder of Ladder 7 Financial Advisories.
If you are at the fag end of the repayment tenure, most of the interest is paid and there is not much saving you may see even if you move to a lower rate of interest.
You should not overlook the reset frequency of the interest rate on offer. If you are expecting the rate of interest to go up and the lender is giving you option, choose MCLR one year over MCLR three months. This will ensure that the next reset of rate of interest will happen after a year and not after three months. The longer reset the better it is, as it means better visibility of your liability in a rising rate scenario.
Real saving and real efforts
Transfer of home loan has got two costs. First the money paid towards processing fee and franking charges and second is the time and effort involved.
“You may come across banks that are willing to waive the processing fee and other costs. But the existing lender may make you take a few trips to complete the process,” says Sukanya Kumar, founder and director of RetailLending.com.
If you are not comfortable with the thought of legwork, you can negotiate with your existing lender. “Most lenders will reduce the rate marginally by charging you a small fee. This saves you from all the efforts,” says Suresh Sadagopan.
More loan – longer term
Balance transfer need not necessarily amount to refinancing the existing loan with a lower rate. You can approach a new lender with the demand for more money or for a longer term or both.
“Existing lenders prefer to lend more money (top up loan) at the rate of loan against property which is higher than home loan rate. But a new lender may give you top up loan at the rate of interest closer to that charged on a home loan,” says Sukanya Kumar. If you are facing cash-crunch and your existing lender is not willing to reduce the EMI amount by increasing the home loan repayment tenure, you can consider switching your lender.
“Though top up loans are easily available, do not sign up for one for the sake of it. If you have a constructive purpose such as funding your daughter’s education, purchasing land or funding your business, then it makes sense provided you can repay it on time,” says Sukanya Kumar.
Current account facility & other benefits
Home loans are not cash cows for the banks anymore. The ‘sell and forget’ mode does not work now. Banks want to chain the home loan customers with more benefits such as zero balance accounts, flexi-deposits facilities, credit cards, locker facilities and current account wherein you can park your temporary surplus to save on the interest costs. When you have been servicing a home loan, you would have got some of these facilities.
If you decide to move out, you should account for the expenses you will incur on these facilities if they become chargeable.
Credit scoreBefore you initiate the talk of balance transfer do check your credit score. It is available free once in a year. This puts you in a better position to negotiate your loans.