Cost of switching home loans to new lenders
Over the last few quarters, the RBI has lowered the repo
rate by 0.5 per cent, which has been followed by rate cuts by banks and
lenders. This has resulted in lower home loan rates. In fact, the falling
interest rate cycle has just begun. Indraneel has a home loan of Rs 55 lakhs that
he took at an interest of 11.00 per cent. The tenure of his loan is 25 years.
Five years down the line, he wants to refinance his home loan for the remaining
tenure at an interest of 11.50 per cent to take advantage of the falling
interest rate cycle. Will this be a wise decision? The new rate is applicable for new borrowers
and not existing ones. Should he opt for a balance transfer to another lender?
Many existing borrowers are looking to switch their home
loan to another lender in order to take advantage of the new rate and lower
their EMIs. When done properly, refinancing can be very beneficial.
However, before Indraneel
goes any further, he must carry out a thorough cost benefit analysis. It is
important to time the loan refinancing in a way that saving on interest payable
is maximized.
Indraneel is likely to find switching lucrative as only five
years of his loan tenure are over, which means a large portion of his principal
is outstanding, as his EMI is mostly made up of the interest component. With
time, the interest component comes down and principal component goes up.
There is no prepayment charge on floating rate loans, but
some fixed rate loans may have it.
Indraneel must check if his lender will levy
the same if he were to prepay and switch lenders. The loan processing charge of
the new lender is the second part of the cost that should also be considered. A
high processing fee may make the new loan quite expensive. Indraneel must also
consider the hassles of repeated paper work that goes into transferring the
home loan from one bank to another.
Therefore, instead of making the switch decision by purely
considering the interest rate differential, Indraneel must make sure that he
factors in all these costs when computing the potential savings. Needless to
say, refinancing is a profitable move only when the potential savings in the
long run are significant.
Cost of
switching :
Provisional Statement charges + Pre-payment charges + Change of tenure charges + Change of EMI charges )
Benefit of
switching using LoanYantra.com :
Helps in minimizing the cost of switching and makes this
process smooth. Your 1-day of your work with
LoanYantra.com can save your 3-years of your salary. Use the balance
transfer calculator to check what you can save.
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