Switching Loans at the Right Time = Great Savings

A colleague at office approached me one day looking quite upset. Here was a young man, in a well to do job, a lovely family and a brand new home who seemed to be carrying the weight of the world on his shoulders.Buying a home was all well and good he said, but the financial burden seemed to be taking its toll. He asked for advice on managing his home loan better and we sat down immediately to evaluate his case. It was quite apparent that my colleague had not contemplated switching home loans.The largest outflow of cash for a household is a home loan EMI. It is a commitment made for a significant amount of time and one that dictates household finances as well.With interest rate cuts yet to be implemented by the Reserve Bank of India (RBI), this may be a time when you may be considering shifting your home loan to another vendor.The primary reason to shift your home loan is for a better interest rate that will ensure you savings in the mid and long term.Like any other major task on hand, it is imperative that you research all the aspects of shifting your loan. Here is a detailed process that you may adopt for the job on hand.

1. Is the time right to move your home loan?

This is the first question that you must ask yourself. Conduct a cost-benefit analysis to help with the decision making. Some points to keep in mind are:

• The focus must be on reducing the interest payable and a switch may be considered only in the difference in interest rates is 0.75% to 1%.
• Lower your loan tenure, higher must be the rate cut and vice versa. If you have five or less years on your tenure, the new interest rate must be at least 1%. For a tenure of above a decade, 0.75% should be a starting figure. Anything over 15 years will benefit from rate cuts that are 25 to 50 basis points.

2. Consider an internal switch

If your calculations say that it is a good idea to make a switch, then check with your existing lender if they are willing to move you to a lower interest rate.Most banks may consider this for a good customer, especially since they don’t want to lose you. The lack of paperwork involved is an added benefit for you.

3. Evaluate the terms and conditions of your new lender

Shifting a loan is not a simple task. Your credit-worthiness will be re-evaluated and your repayment record will be looked into. Even a single default can result in your application being denied. Also keep in mind that:

• In case of a property being constructed, it has to be on the pre-approved list of the lender.
• If the construction is not on schedule, the new bank may deny your application.
• Evaluate the margin requirement (the share of the loan that you pay – 20 to 25%) – if it is high and your loan is a new one, you may end up spending more money to make the switch.
• Fees involved will include processing fees (which may sometimes be waived), valuation fees, stamp duty and possibly others specific to your new bank

4. Switching your loan

Once you have gone through this part of the evaluation process and have decided to go ahead with the switch, you will need to:

• Get a no-objection certificate (NOC) from your current bank.
• Get a schedule of repayment of your outstanding amount.
• Submit this documentation to your new lender for their evaluation.
• On approval by the new bank, your outstanding principal will be paid to your current financier.
• The bank in turn will hand over your property documents to your new lender.

You will now begin paying your home loan to the new vendor with better interest rate. Make the switch only if your calculations show that it worth the change. 

Takeaways

• An ideal situation to switch home loans is when the new interest rate is between 0.75% and 1% lower than your current rate.
• Internal loan switches are a possibility.
• Your switch will be subject to approval from the new lender. This is based on a complete re-evaluation of you as a credit seeker.
• Switching loans involves a significant amount of paperwork.