With the lowest mortgage rates, does it make sense to switch lender for a home loan?
The Indian economy has been experiencing a falling interest rate regime since last year. And the segment that this has brought the most joy into is home loans. Currently, the interest rates on home loans for many banks and HFCs (Housing Finance Companies) are lower than ever before, with most of them offering below 7% pa on different loan amounts, terms and credit profiles of the applicants.
With interest rates this low, it is natural for potential homebuyers to make their dream of owning a home come true with the help of home loans. But the cheers are not limited to them. Even the existing borrowers servicing their home loan EMIs are keeping an eye on these low and lucrative interest rates. After all, who wouldn’t want to lower their mortgage burden, especially since this is probably the greatest financial obligation of our lives and EMIs for home loans make up a significant part of our monthly income.
So if you are one of those existing home loaners scratching your head trying to secure the low interest rates with a balance transfer, just pause and read on as we explain whether this makes sense and what you need to do Think about this before switching lenders for a home loan.
1.Contact your existing bank / HFC first for negotiation
Before submitting your offer to jump on the cheap and lucrative building loan interest rate by switching, first inquire at your existing bank / HFC, where you will be able to repay the building loan. Submit an interest rate cut request and match those offered by other lenders according to your loan amount, credit profile, and term. If your lender refuses to take your application, you can consider making an account transfer to move to another bank / HFC.
All of this also makes sense because your home loan balance transfer request will be viewed by the new lender as a new loan application, so you may have to go through steps such as credit assessment, property appraisal, documentation, and other processes related to a new home loan application again. And since all of these steps usually involve a considerable amount of time and effort, it makes sense to first inquire with your existing lender for negotiation and then, if rejected, proceed with the transfer of the balance.
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2. Examine savings in the total cost of interest
In most cases, the main goal of most home loan transfers is to lower the total cost of interest on existing home loans, especially home loans that are drawn at much higher interest rates. By transferring the balance, you can lower your total home loan interest cost without compromising your liquidity and existing investments, as opposed to prepayment, which allows you to reduce the cost of interest by paying on top of your savings or surpluses, which tend to affect your liquidity. So, making use of the balance transfer option is proving to be a smart move, especially for those existing home loan borrowers who are now eligible to borrow home loans at much lower interest rates from other lenders, for reasons such as an improved credit profile.
However, as mentioned earlier, your balance transfer will be considered a new home loan application by the new lender. Therefore, fees such as processing fees, administration fees, etc. are typically charged by the new lender at the time your credit transfer application is processed. So only decide to transfer the balance if the total savings in interest costs are significant enough after taking the associated costs into account.
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3. Take into account the remaining term of your home loan
Another important parameter to consider when making a balance transfer is your remaining term of the home loan. For most of you, it would not be of much concern to opt for a home loan balance carryover in the later stages of your home loan termbecause you will have to pay for the majority of your interest component yourself in the earlier stages of the term, which means that in the later stages of the home loan term there are relatively fewer opportunities to avail significant savings in the total cost of interest.
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4thUse caution in choosing the tenure after transferring the balance
In the event that you are in the early stages of your tenure and can see significant interest savings, you need to be clear about a decision your new lender will ask you to make – whether to keep the tenure as the remaining term after balance transfer or balance to change. In such scenarios, many borrowers tend to get carried away when they see the EMI amount decrease as the tenure is extended, and thus opt for a longer term than the remaining term of the home loan after the balance transfer. That’s where they go wrong.
If the primary goal of balance transfers is to lower the interest cost, extending your tenure would increase your interest cost and thus miss the purpose of the balance transfer! Extending the term would only make sense if you want to reduce your EMI amount despite higher total interest costs.
Otherwise, if the goal of switching is to save interest costs, it is better for you to keep the repayment period of the new home loan after the balance transfer equal to the remaining term of the existing home loan. On the other hand, if you want to lower the EMI amount after the balance transfer, you can consider a longer term if available. However, try to prepay if you have excess funds as it can lower the interest cost.
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Conclusion: does a change make sense?
With all of this aside, another thing to keep in mind when thinking of getting your hands on those low and lucrative mortgage rates is that they are variable, not fixedwhich means that your interest rate, and consequently the EMI, would vary over the tenure. This is why it emphasizes the importance of switching only on a well-thought-out plan and following the steps above. The conversion through balance transfer would only make sense if the total interest costs can be saved significantly, which would also be possible in the first years of the mortgage lending and not in the later years in which most of the interest components have already been repaid by you. Aside from these two aspects, there could be other reasons to switch if you are not satisfied with the service provided by the lender, such as: Whatever the reason, make sure your financial health is getting benefits rather than being hurt when switching your lender for a home loan.
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