As a borrower, you keenly watch the interest rate movement in the market, as a sizable portion of your income goes into repayment of the home loan. Meanwhile, if there is a slash of home loan interest rates in the market, it will raise your eyebrows.
You start by comparing your home loan EMI with the new offerings in the market in an online home loan calculator. By default, with a lower interest rate, the home loan calculator displays a lower EMI figure than your existing one. This is the point from where you start brainstorming. You consider transferring your home loan from your current lender to a new lender offering a lower home loan interest rate.
But stop! A lower home loan interest rate should not be the sole motivator to transfer your existing home loan. Here are the reasons why you need to think twice before shifting:
Cost-Benefit Analysis
You should measure the benefits of your decision minus the costs associated with the transfer of the loan. In other words, you have to ensure that the net gains that will accrue to you after you switch are higher than the switching charges. Home loan transfer means that you have to foreclose the existing loan and shift to the new lender. Please be aware that your new lender will not bear the pre-payment charges of the old loan.
Moreover, you have to pay the new loan’s processing fee, stamp duty charges (on the new lender’s mortgage document), legal/technical fee, etc., to the new lender. These layers of additional cost can nullify your benefit from the lower interest rate. Thus the purpose of home loan transfer is defeated.
Repayment Tenure
You should not consider transferring your home loan if you are closer to the end of the tenure. Please refer to the home loan calculator to view the loan amortization schedule. You will see that the EMI is divided partly towards servicing of interest and partly for the principal amount. Mostly you pay interest part in the initial years. Thus the idea of switching will not work for you as the interest component in the EMI would be very small if you are at the later part of the tenure.
Check: Home Loan Interest Rates
Credit Rating
Your credit rating plays an important role. You are taking a new loan to repay the old one. Thus, if your credit rating has fallen in between this period you first took the initial loan and now, it could adversely affect your chances of getting the new loan.
MCLR & Base rate If you have borrowed on the base rate, do not think of switching to MCLR, especially if the loan tenure is nearing the end of the difference between the current base rate loan and the MCLR is nominal. Refer to the home loan calculator to adjust the figures to understand the benefit in the long run.
Other Factors
You should also not plan to switch your home loan if you plan to sell the house shortly. Nowadays, time is money. You might experience delays with transferring the loan due to lock-down-related operational issues. The loss of extra time and effort in switching your loan might not be a worthy decision.
Conclusion
Given the current sentiments, no lender will like to lose an existing customer, like you, to a competitor. Hence in all likelihood, your existing lender will take you up on the offer. So it is advisable to contact your lender first before you initiate the loan transfer process.
Also, Read:
Difference Between Fixed And Floating Interest Rate For Personal Loans
