Is it right time to shift home loan?

The wholesale and consumer inflation has cooled off but EMI inflation has refused to budge. This is because the Reserve Bank of India (RBI) is still in wait-and-watch mode before commencing interest rate cuts. However, with inflation under control, rate cuts will happen sooner or later. And banks too would pass on the benefit to their new customers. But if you already have a home loan, making a switch for a lower rate cut would seem enticing. Keep in mind the following things before you go ahead.

Do cost-benefit analysis

It is important that you do a thorough cost-benefit analysis before making the home loan switch. It's the interest portion that pinches the pocket. Therefore, your aim should be to save as much as possible on the interest portion payable to the bank. Ideally, you should not make a switch unless the rate cut is at least 0.75-1%. The remaining loan tenure and difference in interest rates together play an important role in making the decision to shift the loan. Lower the tenure, higher should be the rate cut and vice-versa. So for instance, your remaining balance tenure is less than five years, then the difference in the new and existing rate should be at least 1%. On the other hand, if the outstanding tenure of your loan is around 10 years, then don't settle for anything lower than 0.75%. In case of longer tenures, a small rate cut can have a major impact. In case the balance tenure is as long as 15 to 20 years, you can save a lot of money even on a rate cut of 25 to 50 basis points. However, these are thumb rules and you should do your own calculation.

Explore the option of internal switch

Before deciding to move to other bank for a lower rate on your home loan, it is always prudent to check with your own bank if it is willing to offer the same. Most banks do not want to lose an existing customer to another bank and might shift you to a lower rate that they are offering to their new customers. In most cases your bank would charge a conversion fee which ranges between 0.5% and 1% of the outstanding amount. Another advantage of negotiating with your existing lender is that you would save on time and paperwork. The new lender would go for your credit evaluation and verification of the property as well as in case of a new customer. Besides you have to shell out legal fees and stamp duty even if the processing fee gets waived off. All these charges would add on to your cost that you must factor in.

Consider new bank's terms and conditions

Shifting your loan to a new bank is not an easy ride. The lender would consider a host of factors before disbursing you the loan. One of them is your repayment record with the previous lender. If you have defaulted few times or simply were late in paying your EMIs, your request could be turned down. In case of loan for the property under construction, the former should be on the pre-approved list of the lender. Also, your new lender might not consider giving you loan if the construction on your home is behind schedule.

All the above factors are important and must be considered before shifting home loan to another lender.

The writer is director & co-founder, www.creditvidya.com