Switching the loan to a lender offering a lower interest rate helps the borrower in the long run. However, note that switching the loan will not be possible in case of irregular repayments made by the borrower to the current bank.
Home loans are long-term loans, whose tenures generally range from 15 to 30 years. So, in the middle of these tenures, when borrowers find more cost-effective lenders, they switch their home loans to them. The borrowers get better interest rates on their loans along with lower or no prepayment penalties and processing fees.
Transferring balance or switching of home loans is usually done when the loan is taken over by a new lender by paying off the old lender in full. The borrower then starts paying the new lender EMIs, which come at a better interest rate.
Opting for loans, especially home loans, which come for longer tenures, at a higher interest rate is not a smart financial decision. Hence, switching the loan to a lender offering a lower interest rate helps the borrower in the long run. However, note that switching the loan will not be possible in case of irregular repayments made by the borrower to the current bank.
Here are some points to look at before transferring/ switching a home loan:
Process of the Transfer
Firstly, as a borrower, you need to close the deal with your existing bank. For this, you need to submit a letter to your current lender requesting a loan transfer. The bank will give a consent letter or a no-objection certificate (NOC) based on your request, with the details of your outstanding loan amount.
The consent letter then needs to be given to the new lender who approves the outstanding loan amount on your behalf to the old lender. Once the transaction is completed, the new lender gets hold of your property documents.
If you have taken a loan of Rs 40 lakh for a tenure of 15 years and you are paying an interest rate of 9.05 per cent – the total interest outgo on this loan will be around Rs 33.24 lakh. But even a slight change in the interest rate can make a major difference, especially for this type of loan with longer tenures.
For instance, if the interest rate is 8.05 per cent, and the loan amount and the tenure stay the same, the total interest outgo will decrease to Rs 29 lakh, which will save up to Rs 28,000 annually.
Additional Cost Involved
Processing fee- A processing fee is charged by the new lender, on the transfer of the loan. However, this fee can be negotiated with the bank and lowered down or waived off.
Pre-payment charges- For a fixed loan rate, banks generally charge a penalty amount, but in the case of floating home loan rates, there is no prepayment penalty added.
Legal charges- Legal charges are for hiring lawyers to validate the legal status of the property. Hence, the charges are recovered from the borrowers.
Stamp duty- The borrower also has to pay the bank stamp duty, which needs to be paid to the government due to the title deed submitted with the bank.