FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Understand loan transfer!
A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market. Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens.
Such individuals could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.
How does the process work
You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.
The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.
A prepayment penalty was earlier levied by the existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. However recently NHBs and some banks like ICICI and SBI have waived this fee, but some banks could still charging a penalty. Do check with your bank and try to negotiate a waiver as the RBI and NHB mandate clearly are not in favour of penalty for prepayment in the case of a floating interest rate loan. Also, remember that you will also need to pay a processing fee to the new lender, which could also be negotiated and waived in this high interest rate regime.
This can range anywhere between 0.5% to 1% of the loan applied, most banks restrict this amount to Rs.5000.
Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.
The current interest rate climate however looks unfavourable for a switch unless you want to do it for other reasons. Starting this new year all major banks have increased their interest rates by 0.25% to 0.75%. More hikes are expected after the RBI monetary policy review slated for the end of January.
Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank etc. and a loan will be approved only when conditions are met.
Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:
Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.
Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.
Service issues: Sometimes you might just be unhappy with your bank’s service and accessibility, which might prompt a change.
Things to watch out for:
- It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.
- In the recent past a loan transfer was the most sought after when teaser loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.
- Get a statement from your current lender stating that property documents will be dispatched within a certain time frame to avoid hassles on this front.
- Remember that a loan switch will not be possible if you have been irregular with your loan repayment with your current lender.