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
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
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.