What’s the right time to switch a loan?

Loans get cheaper only for new bor­row­ers af­ter banks an­nounce in­ter­est rate cuts. It makes sense for old cus­tomers to change their lenders to avail the ben­e­fits of the rate cuts - pro­vided they do so dur­ing the ini­tial years of re­pay­ment

HT Estates - - HTESTATES - Rishi Mehra

Why should you switch from one home loan len­der to another? Firstly, switch­ing home loans helps you avail ben­e­fits of lower in­ter­est rate which brings down the equated monthly in­stall­ment. Se­condly, it helps bor­row­ers keep their equated-monthly in­stall­ment (EMI) amount con­stant and have their re­pay­ment term re­duced.

Many bor­row­ers also switch loans to change the in­ter­est type – from fixed rate to float­ing and vice versa. Bor­row­ers switch from fixed rate to float­ing when they feel that the Re­serve Bank of In­dia (RBI) may re­duce in­ter­est rates in the fu­ture.

Sim­i­larly, when there is a pos­si­bil­ity of a hike in in­ter­est rates, bor­row­ers switch from float­ing to fixed rates. If one were to look at the cur­rent sce­nario, there is ev­ery like­li­hood of the in­ter­est rates go­ing down.

Cost of switch­ing

Lenders levy a one-time fee for switch­ing loans. The fee can be some­where around 1 to 1.5 per cent of the amount. In some cases, banks charge a fixed amount. Bor­row­ers should also take this fee into con­sid­er­a­tion be­fore switch­ing their loan.

If you are switch­ing your loan with an ex­ist­ing len­der, your bank may charge you a con­ver­sion fee of 1 to 2 % of the out­stand­ing amount. This step saves you from the has­sles of doc­u­men­ta­tion.

When to switch?

To avail max­i­mum ben­e­fit, you need to switch dur­ing ini­tial years of re­pay­ment. As you near the end of your re­pay­ment ten­ure, your EMI com­prises more of the prin­ci­pal com­po­nent and less of in­ter­est. Switch­ing loan at this stage would serve no pur­pose. Do not switch your loan un­less you have a re­main­ing loan ten­ure of at least 8 to 10 years.

How to save more?

The thumb rule for good sav­ings is to switch only if you have at least 8 to10 years of loan ten­ure left or the dif­fer­ence be­tween your ex­ist­ing and new

in­ter­est rate is at least 1%.

Pro­ce­dure to switch

loans

Fol­low­ing are the steps re­quired to switch your loan:

Write to your bank in­ti­mat­ing that you plan to switch men­tion­ing rea­sons for the step.

Seek con­sent let­ter from your ex­ist­ing bank giv­ing its nod to switch loan.

Pro­cure doc­u­ments such as ac­count state­ment, fore­clo­sure state­ment and pa­pers re­lated to prop­erty from your ex­ist­ing len­der.

When you ap­proach your new len­der, the pro­ce­dure is the same as ap­ply­ing for new loan.

You would re­quire doc­u­ments such as iden­tity proof, copy of PAN, pre­vi­ous bank state­ments, ad­dress proof, copy of ti­tle deed of prop­erty, salary slip, copy of in­come tax re­turns, etc.

The new bank will sanc­tion the loan af­ter due credit ap­praisal and other in­ves­ti­ga­tions.

Fixed or float­ing?

There are a num­ber of banks and hous­ing fi­nance com­pa­nies that of­fer nu­mer­ous home loan prod­ucts. Cus­tomers gen­er­ally get con­fused as to what kind of in­ter­est rate is bet­ter for them – fixed or float­ing?

Fixed rate is good for those who are good at bud­get­ing while float­ing rate serves well when in­ter­est rates are low. You must as­sess your re­quire­ments and then choose what­ever suits you well.

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