SMART SOCHO - Squeeze maximum savings while shifting home loan

Hello and Kem chho!

A home loan is a necessary evil if your eye is on future returns from your property, especially if you don’t want to break into your own inheritance money/saving that is already well invested. Even so, most borrowers rue having to shell out a significant portion from their monthly earnings. Over a period of time, borrowers realize that they are paying quite a high cost for borrowing; so one tries to look for ways to save as much as possible.

They look to shift their loan to a bank that offers a lower rate of interest. But what often happens is this: They get lured by the lower rate cut and expect their monthly outgo to be reduced. Some borrowers fail to add the cost of transfer - the processing fee, the change in tenure and other mandatory costs like stamp duty, paperwork, etc., into their total cost. The total outgo across the outstanding period may still turn out to be higher than if you had continued with your first borrower.

So be wise like a Gujju and calculate every penny spent and try to save the maximum. In case you are looking to shift your loan, here are a few things you must do/consider.

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Compare the total outgo in both cases

If another bank offers you a lower rate of interest, calculate how it’s going to impact your original pay-out plan. Add up every single EMI, before and after shifting, plus the processing fee, other unavoidable costs, etc. The difference will be the net saving or net loss from making the choice. And this difference is not a negligible amount by any stretch of the imagination. So, be smart about money and make every single rupee/paisa count. Consider the offer only if it’s 0.75% to 1% lower, else give it a skip. As a rule, you should expect: shorter the remaining tenure, bigger the rate cut, and vice versa. An example: if you still have around 10 years tenure remaining, ask the new lender (bank/financial company) to offer you a new interest rate which is at least 0.75% lower. And if the remaining tenure is about 4 or 5 years, then it makes sense if the new interest rate is at least 1%. If not, the loan shift is not likely to make a significant difference to your outgoings. 

Is the timing right for a shift ?

Shifting your loan in the early tenure hurts the pocket less compared to shifting after a few years. This is because a substantial portion of the interest due has already been paid out during this time. But then certain situations may prompt you to make the shift: if your bank offers a lower interest rate to new buyers but does not give you the same benefit; and another bank welcomes you by offering a lower interest rate. Also, never forget, shift to another bank soon after it has announced a new (lower) rate of interest.

Need a Top-Up Loan

Sometimes the borrower requires an additional loan. The reason could be the cost of furnishing the new property. In such a case, if your bank is not willing to give you a Top Up Loan, it may be time to knock on other bank’s doors. Nowadays, some prominent banks and financial institutions try to lure borrowers of other banks with the promise of a lower interest rate as well as a Top Up Loan if required. Don’t forget to calculate as suggested in first point (Compare…) above.

Keep an eye on the news

Read the financial news regularly to ensure you don’t miss important news like the RBI announcing a new interest rate. As the new budget has somewhat controlled inflation, one expects a rate cut pretty soon. The RBI might lower current rate by some (25 to 50 basis) points. The more basis points, the lower the interest rate you should expect. Once the Central Bank makes such an announcement, all banks have to bring into effect a new interest rate. But that new rate is applicable only to new borrowers (after the announcement). If so, it may be time to look elsewhere.

Prepayment charges

In case of floating rate home loans the lender does not levy a Prepayment Charge if you opt to move your loan to another bank. (It is prepayment because the other bank would be ‘prepaying’ your outstanding loan amount fully, hence the charges) This rule was not compulsory for fixed rate home loans. But one should always check with the first lender. They may charge you a penalty for shifting your home loan. Such charges are clubbed under Cost of account closure. In some cases banks are known to arbitrarily increase these charges when they find out that the borrower is transferring the loan.

Read the fine print

Many banks follow this practice of insisting the borrower buys insurance from a company they promote. Some may even ask you to deposit a sizeable amount in their FDs, saying it’s a rule. Clarify your doubts, ask them if the rule is in line with RBI guidelines.

Ask if original collateral is required

If you are well into your loan tenure and just a few years short, then there is no point giving the property as collateral. The documents to your property can be used to get another loan if and when required. From your holdings/properties, offer something of lesser value than your current property for which you’ve taken the loan.

Cost of repeating procedures

The new bank will treat your application as a new one, and accordingly, they will expect all the procedures to be carried out: legal verification, ownership title, KYC, credit appraisal, property evaluation, etc. All these cost time and money. Besides, the new bank expects a processing fee (which is between 0.5% to 1.5% of loan applied for).

Post-Disbursal Interest

Once your loan transfer application has gone through, and the loan has been disbursed, there is still a gap of 2 days after which you receive the cheque. Funny thing is, both the lenders – your first one and the new one will charge interest for 2 days! Clarify if you can with your lender if you really have to pay that. It is only fair to charge you interest from the day you receive the cheque, isn’t it? This should help you to remember that when you receive the cheque (for your outstanding loan amount) from your new lender present it to your old lender immediately/on the same day.

Finally, consider if your old lender has been nice and polite to you. Talk to them about your concerns and see if they are willing to offer you a lower rate. If they accept then you stand to save all the expenses required for compulsory documentation, stamp duty, legal fees, plus they might even waive off the processing fee. Lastly, remember that banks are there to do business. They will investigate your credit-worthiness, i.e. if you have been late in paying any of your EMIs or have taken loans from other banks as well. It is only after they are fully satisfied of your credentials and credit-worthiness, that you can expect the refinancing application to be accepted.