Ten years is a long period in one's life. Especially if you have a monthly EMI to meet with, that takes away on an average one-fourth of your monthly salary. Every month, when you transfer that EMI money from your salary account to loan account, you will be wondering when this loan is going to end. And if you have taken a loan on a 15-year repayment agreement, and when you realise that you have already completed 10 years, there is an urge in you to call the banker and hear the sweet news that now only one-third of the loan amount is pending. But then comes the shocker. Most likely the bank employee sitting in the loan section of your bank is likely to tell you that more than 50% of your loan is still pending.
That is because a lion's share of the EMI you are paying will be going as repayment of your loan's interest component only. Only in the final years of your loan period you will find maximum portion of the EMI you pay getting diverted to the principal component. This is one main reason why you should be timing properly if you are planning to repay the remaining loan amount and closing the loan account. Especially if you are benefitting by showing home loan to avail a cut in Income Tax.
However, during the 15-20 year period of your home loan commitment, many things can change in your life. Your personal financial situation including the volume of your take-home salary, the state of the economy, government policies, and most importantly the interest rates. This demands that you should always keep track of the outstanding amount you owe your bank on the home loan. A regular review of the home loan will help one take a financially pragmatic decision when it comes to foreclosure of the loan amount, switch over to floating rates, balance transfer or top up.
Foreclosure: Firstly, you should take a detailed look at the tax benefits that your home loan offers with respect to the principal payment and interest component before taking a decision on the foreclosure. You have the option of foreclosing the entire loan or paying up part of the outstanding home loan to bring down the EMI or the tenure of the home loan. You will have to submit a written application for the foreclosure or part payment along with loan sanction papers and your adress proofs and Identity card. Almost all the banks do not charge any levy on part payment of the loan, though there are some financiers who charge a fee for foreclosing. While foreclosing the home loan, make sure that you get back the custody of all original property documents from the bank.
Switch over to floating rates: Though the Reserve Bank of India had gone for repeated rate cuts in the last one year or more, most of the banks were reluctant to pass the benefits to its home loan customers. The Union Finance Minister had to warn the banks repeatedly to force them pass on the rate cut benefits to home loan customers by slashing the interest rates. Even the RBI had to nudge the banks and finally give an ultimatum asking them to offer floating interest rates mandatorily for their home loan customers. Even after the banks started offering new home loans with floating interest, many of them didn't transfer the existing customers to floating interest rates. You will have to approach the bank in person and submit a written request and then fill up the form for the same. The bank will also charge a few thousands as conversion fee for shifting your home loan with fixed interest rate to floating rates.
Balance transfer: Home loan customers who want to take advantage of the lower interest rates, or those who find their banker non-cooperative in switching over to floating rates, or if the banker is quoting too much money as conversion fee on your existing home loan, it is better that you transfer your home loan to another bank. For this one will have to a decent credit score which will naturally be there if you have made your EMI payments on time. You need to fill in balance transfer form, along with KYC and furnish income, employment proofs, NOC from the bank, existing loan papers and a pre-closure letter along with the statement of payment history to the new financier. Normally banks don't charge any processing fee for those who are shifting their home loan to their bank.
Top-up loan: One can avail a top-up loan to meet (emergency) financial needs up to the originally sanctioned home loan amount. For this, a home loan customer needs to fill up a form that will facilitate him avail the top-up facility. He will also have to provide the title deeds and KYC details such as PAN, proof of identity and proof of address, employment proof, income proof, and other documents. Since this is treated as a personal loan the interest rate normally will be on the higher side. Also, the banks normally charge a processing fee on the top-up loans it offers. One can also avail a top-up loan along with a balance transfer loan from the bank or the financing company.
To sum up, to take maximum advantage of lower interest rates on your home loan or to ensure that your home loan provider, i.e. your bank, is delivering on its commitments on repo rate cuts and subsequent slashing of interest rates, and also providing you with best of its services, one should make timely calls to the bank's home loan section customer services and collect those vital details. Check out how much is getting drained from your pocket and by what all means you can check them. Also, which of the above-discussed options will be best suited for you to bring down your interest rates. If you have a timely EMI payment history and credit score, transferring your home loan to another bank should be your final option.
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