Banks decrease their home loan rate for the new customers but old customers did not get the advantage of low-interest rate. Most people are unaware of their home loan interest rate also. Once they take the home loan they forget everything about the loan. The only thing they remember is how much EMI they have to pay. Some persons think that their home loan outstanding is also decreasing with the lower interest rate.
Recently, one of my friends contacted SBI to reduce his home loan rate based on MCLR as the bank has reduced their MCLR after the demonetization. Bank manager replied that he has to pay 0.58% of the outstanding amount to convert the amount to MCLR. He finally calculated the cost-benefit and rejected his plan to reduce the interest rate. Before the incident, he thought that nationalized bank like SBI should automatically reduce the interest on the outstanding home loan. After the reply from the manager, he actually lands to reality.
If you want to buy your dream home easily read How to approach for buying your first home in your 20s.
To get the advantage of lower interest rate you have to transfer your outstanding balance on the home loan to new banks or NBFCs such as HDFC, DHFL etc. Now, should you transfer the loan or you should continue the loan as some cost is associated with the switching of the loan to the new lender? By reading this article you will be able to know how to transfer home loan to another bank
How to Transfer Home Loan to Another Bank:
Switching your home loan from an existing lender to a new lender requires a lot of processes which you have to undergo. Firstly, remember that switching is similar to applying a new home loan to a new lender. Hence, you have to provide all the documents which you have provided earlier for taking the home loan. You have to provide proof of address, identity, income, and property.
Benefit of Transferring Home Loan:
The biggest advantage of switching your home loan is the financial benefit. You will have low EMI compared to earlier as the interest rate is down. You can have the option of reducing the balance tenure for the home loan. Moreover, you can take a top up loan over the existing home loan for furniture and other decoration.
Should You Transfer the Home Loan?
Now, you know the procedure how to switch the loan and its benefit. Will you take the decision of switching the loan to a new bank just by knowing that the interest rate is less in the new bank? As I have already informed that switching of home loan does not give you benefit every time because the cost is associated with this process.
You have to pay the processing fees and other legal charges to the new lender where from you have decided to take transfer your loan. If a home loan with fixed interest rate is going on, you may have to pay foreclosure charges to the bank for closing the loan early. For floating rate interest, there is no foreclosure charge for closing the home loan early.
Suppose Mr. Roy has taken a loan with IDBI Bank with an interest rate presently at 9.65%. It’s a floating rate of interest with an outstanding amount of Rs 1400000 and balance tenure is 12 years. Present EMI for the loan is Rs 16,500.
Now, a representative of Axis Bank called Mr. Roy for switching the home loan to their bank. Axis Bank offered Mr. Roy the effective rate of interest as 8.5%. Axis Bank also informed Mr. Roy that he has to pay Rs 10,000 as the processing fee for the new loan or the balance transfer which he wants from IDBI Bank.
What will Mr. Roy do now?
He should continue with the loan with the same bank i.e. IDBI Bank or he should transfer the outstanding balance to Axis Bank. Let us consider, he does not require a top up loan.
If Mr. Roy is taking a loan of Rs 14 lakh at an interest rate of 8.5% for the tenure of 12 years, the EMI is coming around Rs 15,540. It clearly shows that a monthly saving of Rs 910 for a period of 12 years in the EMI at the cost of Rs 10,000 paid up front.
To fetch a cash flow of Rs 910 per month basis on a period of 12 years the fund requires is Rs 53,700 which is more than Rs 10,000.
You have a saving of Rs 43,700 in today’s value. If you invest this amount today, it will give you more benefit. But it is always advised to lower your balance tenure rather than EMI. It will help you to close the home loan early and have a debt free life.