Learn about switching home loan costs!
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 :
Pre-payment charges (if any) + Processing fee + Legal charges (if any) + Yearly home insurance (if the lender says its must) + Other hidden charges ( SMS charges +
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.