Home loan interest rates are at a nearly 15-year low, with State Bank of India (SBI) offering home loans starting at 6.95 per cent a year. Many others, particularly public sector banks, too, are now charging sub-7 per cent rates after the Reserve Bank of India’s (RBI) cumulative 115 basis points repo rate reduction since the COVID-19-induced lockdown.
From October 1, 2019, all new retail floating-rate loans sanctioned by banks are linked to external benchmarks. The repo rate is the external benchmark in the case of most banks. In this regime, any cut in repo rate will be passed on to you entirely, unlike earlier, when banks could be economical with the interest transmission. If your loan is still linked to older regimes like Marginal Cost of Funds-based lending rate (MCLR) and Base Rate, you have no reason to delay a switch – either within your bank or to a new lender. Every penny saved counts, especially in these pandemic times.
Even if your existing loan is linked to an external benchmark, you must make the move if other banks offer lower rates.
What is home loan balance transfer?
Home loan balance transfer, or refinancing, means shifting your outstanding home loan to another lender. You can take this route if you find another bank that offers cheaper rates than your existing lender. The bank that is taking over your loan will treat it as fresh disbursement. This tool carried greater value when loans were not linked to external benchmarks.
When RBI’s policy rates inched downwards, banks would drag their feet on passing on full benefits to existing borrowers even as they lured new borrowers with relatively lower rates. Now, with repo-linked rates, banks have no choice but to transmit entire RBI rate cuts or hikes. While housing finance companies’ rates are not linked to external benchmarks, competition is likely to compel them to do so. Yet, the card rates across banks vary, which means that you ought to keep an eye on what you are paying versus what other banks offer.
When should I switch lenders?
Even a 25-35 basis points difference can mean huge savings, since home loans are for the longer tenure. For example, let’s say you have taken a Rs 75-lakh loan with an original tenure of 20 years, of which, three years are complete. One percent point is equal to 100 basis points. Your current interest rate is 8 per cent per annum, but you know of another bank that is offering a 7.5 per cent interest rate. If you do opt for the balance transfer, you will have to pay 13 fewer EMIs, saving Rs 8.15 lakh over the balance tenure. “In fact, even a 25-35-bps difference is good enough to induce you to make the switch,” says Vipul Patel, Founder, MortgageWorld.com, a loan consultancy firm. In the same example, a 35-bps reduction will help you shave off nine EMIs from your repayment tenure. However, ensure that you negotiate with your existing bank before taking the final call. If your bank agrees to match the new offer, you will not have to deal with the paperwork.
Are there any charges for switching banks?
You will not have to shell out any pre-payment or foreclosure charges when you switch. However, your new lender could levy a processing charge. In the case of SBI, it is 0.40 per cent of the loan amount plus GST – the minimum amount is Rs 10,000, while the upper limit is Rs 30,000 plus GST. This includes advocate and valuer fees. In case you switch internally from MCLR to external benchmark regime, again, your bank could charge a one-time administration fee.
What documents would the new bank ask?
The new bank could ask you to submit all Know Your Customer (KYC) and property documents, bank statements, income proofs, original documents with the existing lender and previous loan account statement, among other things. It will then initiate your loan assessment process. The amount will be disbursed after these standard checks are completed.
Can the entire process be completed online, given the COVID-19-related risks in visiting branches?
You can either visit the branches or send an application online, expressing an interest in balance transfer. While some lenders could allow you to submit loan application and even upload documents online, the process will involve physical checks. SBI, for instance, enables preliminary application online. PNB Housing Finance has recently announced an electronic platform that digitises processes such as loan application, verification, video-based KYC to minimise physical interaction.
However, lenders also need to carry out the verification process of your house, place of work and so on. “There would be some points of interaction, as officials will have to visit your house for these checks,” says Patel. If you are moving internally to your bank’s external benchmark-linked lending rate, though, the process can be completely virtual, depending on the bank’s IT preparedness.
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