A home loan transfer is considered by borrowers when they wish to get a better deal at an alternative bank for the benefit of a cheaper interest rate with no prepayment penalties or other offers. On switching a loan, the loan balance with the previous lender is paid in full by the new lender. The borrower then starts paying the EMIs (Equal Monthly Installments) to the new bank.
It makes sense for a borrower to switch loans with a long repayment tenure like a home loan because it helps them save more. The extent of savings will depend on the outstanding amount, tenure, difference in interest rates and charges of switching loan.
Here are seven things to consider before you make a home loan transfer:
1. Bank loans issued after 1 April 2016 are based on MCLR (Marginal Cost of based Lending Rate). The older ones were issued on base rate and those who had applied for a loan before 2016 have the option to choose to switch to MCLR by paying a fee.
As for non-banking finance companies and housing finance companies, they do not follow MCLR and rates could be based on market standards and their competition.
One needs to compare the difference in these rates before they make a switch.
2. As mentioned before, home loans from banks are based on MCLR. While MCLR was introduced to reflect changes in RBI's repo rate faster, for the ease of customers home loan interest rates are usually revised at the end of completing a year (known as the reset period).
For example, if the home loan was issued in March 2018, the next revision will be made in March 2019, and that is when you can decide whether or not you should make the switch.
Note that if your bank allows it, you can set the reset period to quarterly or half yearly. The interest rate changes made by the RBI (repo rate) will be reflected faster when the reset period is reduced. While it is beneficial when rates fall, it may not be as convenient the other way around.
3. Home loan should ideally be switched when the interest rate is higher than current market rates and the transfer lowers your EMIs.
4. It is not advisable to switch your home loan if you closer to the end of your tenure or planning to sell the house in the near future.
5. You have to weigh in charges and calculate if the expense of transfer is worth it. While the existing bank is not allowed to charge a prepayment or foreclosure fee, you will have to check that with the lender. Additionally, you may have to pay processing fees with the new lender and that may be one percent of the outstanding loan amount.
6. A loan transfer is like taking a loan to pay off an existing loan, which means the procedure will be the same as applying for a new one. If your credit rate has fallen between the time you first took the initial loan and now, it could reduce your chances of being qualified to get a loan transfer.
7. Since home loan transfers are like getting a new loan, the process would take 15 to 20 days. If one is moving from base rate to MCLR within the same bank, the waiting period should be shorter.