Things to consider before you transfer your home loan
If you are looking at changing your home loan lender, here are few important pointers to help you take the right decision.
Switching, balance transfer or simply transfer refers to a loan being taken over by another lender by paying off the old lender in full, after which the borrower will start paying the equated monthly instalments (EMIs) to the new lender.
People usually switch lenders to get better interest rates on their loans and get the benefit of lower or no prepayment penalties and processing fees and other goodies.
Why borrowers switch
Servicing a loan, especially if it is a home loan, at a higher interest rate than what is offered by other lenders is not a sound financial decision. Switching to a lender that is offering a lower interest rate makes sense especially if you have a longer tenure left to repay as you will make substantial savings on the interest outgo. The actual savings will, however, depend on the amount of loan outstanding, difference between the interest rates, tenure remaining and the cost involved in switching.
Interest rate regime
All bank loans, including home loans, taken after April 1, 2016, are now linked to the bank's marginal cost of funds based lending rate (MCLR). Earlier, they were linked to the bank's base rate. In addition to banks, one may consider taking home loans from non-banking finance institutions (NBFCs) or housing finance companies (HFCs). Both, however, do not have the concept of MCLR and, thus, may set their own rates based on competition and their cost of funds.
After the RBI's hike in repo rate in June,2018 and with cost of funds of banks going up, most bank's MCLR are rising. Bank of Baroda, Andhra bank, Syndicate bank amongst others have already raised their MCLR. The country's largest bank State Bank of India (SBI) had hiked its MCLR by 0.10% across all tenures with effect from June 1, 2018
If you are looking at changing your lender, here are few pointers to help you take the right decision.
I. Borrowers on MCLR linked home loan
If your bank is offering a high home loan interest rate (MCLR plus spread) then look for refinancing. Get the home loan refinanced from a bank offering a lower interest rate. Anyway, the existing bank is not allowed to charge foreclosure or full repayment charges. However, you may have to pay processing fees with the new lender (which is usually 1 percent of the loan). Other charges may include lawyer's fees, mortgage charges, etc. which you may have to incur while switching. Remember, the new bank may ask you to buy a home loan insurance cover plan, which is not mandatory. Get the loan insured through a pure term plan instead, in addition to any insurance that you already have.
When to transfer: For the new home loan borrower who has taken a loan after April 1, 2016, (when MCLR lending system started), the banks reset the interest rate after 12 months. So, if someone has taken home loan from a bank, say in May of 2018, the next re-set date will be in May of 2019. Once the reset date arrives, evaluate the decision to make a transfer or not.
II. Borrowers on base rate
The base rate borrowers have two options - switch to an MCLR loan with the same bank or transfer, i.e., get the loan refinanced from another bank on MCLR mode. One may also continue the loan on base rate, especially if the loan term is nearing the end. If the differential between base rate at which old borrowers are servicing their loan and the current MCLR is wide, it's better to switch to MCLR of the same bank or another bank offering lower rates.
When to transfer: Base rate borrowers can switch to the same bank's MCLR anytime by paying a certain fee and signing a single page document. Even if they want to switch to another lender, it can be done without any waiting period.
After moving to the MCLR system, there is always the risk of any upward movement of interest rates before you reach the reset period. If the Reserve Bank of India (RBI) raises repo rates, MCLR, too, will move up as is being seen in current times. In a falling interest rate scenario, putting MCLR re-set date as quarterly or half-yearly could be a better option, provided the bank agrees. But when the interest rate cycle turns, the borrower will be at a disadvantage.
In addition to choosing the lowest home loan interest rate and keeping an eye on the reset period, ensure that the agreement allows prepayment, foreclosure and switching to another lender with no penalties. Also, evaluate the decision based on the quantum of loan sanctioned (vis-a-vis another lender), documentation formalities and the estimated time for actual disbursement to happen.