Customers must
exercise caution while transferring housing loan as there’s no guarantee that
new lender would not hike interest rates, says Ms. Preeti Kulkarni
Some major banks like
ICICI Bank, Axis Bank and housing finance major HDFC have raised their lending
interest rates by 0.25% in the last few days.
Many other banks,
particularly public sector banks, have not hiked their interest rates so far.
However, it is enough to unnerve some housing loan customers who are struggling
to pay their EMIs regularly.
Typically, many home
loan customers are wondering whether they should switch to a lender offering a
lower interest rate.
“Under ordinary
circumstances, borrowers should switch to lenders who are willing to offer a
lower interest rate, even if the difference is just 0.25%. Even with this minor
difference, they could save Rs. 2,000
per month on a .Ra. 50 lakh loan with a balance tenure of 17 years,” says Vipul
Patel, Director, Home Loan Advisors.
“However, in the
current scenario, rates are yet to stabilise. So, borrowers should not be in a
hurry to switch lenders at this juncture. This decision should be taken after a
month or / so, when other lenders
announce their revised interest rates,” he adds.
Does it Make Sense
Now?
For floating interest
rate borrowers, switching lenders has become easier since the abolition of
pre-payment penalties. Also, many banks reduce / or completely waive off the
processing fee someone with a good repayment record.
That perhaps explains
why everybody thinks about shifting to a new lender every time there is hike or
reduction in interest rates.
However,experts don’t
think it may be at the best strategy at this juncture. “There is no guarantee
that the new lender will not increase the rate later. In such a fluid
situation, it is better to adopt a wait-and-watch approach,” says V.N
.Kulkarni, Chief Credit counselor, Abhay Credit Counselling Centre. “And even
after undertaking the exercise, there is no certainty about the new lender
keeping its interest rate lower than the market rate. So the switch over might
be an exercise in futility,” adds consumer activist Jehangir Gai.
However, if the
interest rate differential between the interest rate you are paying - say over
0. 50% - and the ones prevalent in the
market is significant, switching certainly makes sense, even in the current
scenario.
Consider this
scenario..
You are paying an EMI of .Rs. 51,609 on your
housing loan (Rs. 50 lakh loan for 20
years at an interest rate of 11 % per annum).
Now, your bank
increases the rates by 0.25 %. So, you switch to another bank, which is
offering a loan at an interest rate of 10.50 %. But you decide to maintain the
EMI at old levels of Rs. 51,609.
In this case, your
housing loan would close in 15 years and 8 months, resulting in an overall
saving of Rs. 13 lakh (Nearly).
“In case you decide to reduce the EMI, your EMI would immediately come down by Rs.
1,536, resulting in an overall saving in interest cost of Rs. 8 lakh (Nearly).
Even if the new
lender were to raise its rate by 0.25% points after a few months, your EMI will
yet be lower by Rs. 770. That is, savings of Rs. 6 lakh over the loan tenor,”
explains Patel.
Negotiate or /
Switch?
A customer has 3
options before her if he/she wants to bring down the interest rate on the
housing loan. One, negotiate with the bank. “Most banks are willing to
negotiate when the clients express their intention to switch, as they are keen
on retaining good clients,” says Mr. Patel.
The second option is
to transfer the housing loan to another bank. Moving to the lower rate offered
by your existing lender (for new customers) by paying a conversion fee (in the
range of 0.5% to1.5 % of the outstanding loan amount) is another alternative.
He/she recommends
negotiating with lenders before exploring the other 2 options. If negotiations
fail, you can explore the conversion facility. “Some banks will charge a small
fee and realign the margins & reduce rates. If both these strategies
(negotiation & conversion) fail, the borrower should consider moving the
loan to more competitive banks,” he says.
Depending on your
interest rate, loan amount and balance tenure, balance transfer could work out
to be a better option compared to conversion, if you are willing to be patient
with the laborious documentation process.
For instance,
assuming a 1% conversion fee, on an outstanding loan of . 47,54,960, will work
out to . 53,427 (including service taxes). In contrast, the cost of switch to
another lender — including processing fee, stamp duty, registration fees and
other fees — will work out to . 22,746, according to Home Loan Advisors. So, if
the current applicable rates offered by the new lender and your existing lender
are the same, switching might make more sense.
“Some lenders
charging slightly higher rates than their competitors are offering 1% cash back
if the EMI payment is made through auto debit from an account maintained in the
same bank. One should opt for such offers to save money. Also, this will be a
better option than switching over to some other bank, as the effective rate
could work out to be cheaper than lower rates offered by other banks,” says
Kulkarni.
ET
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