MERITS OF A MIDWAY SWITCH

Transferring your home loan balance to a new lender is a viable idea if you are being charged a significantly higher interest rate. But mind the gaps

If you have a home loan and the lending bank/ financial institution is charging a significantly higher interest rate than rates other banks are offering, then it’s time to opt out and a transfer the balance amount of your home loan to another lender. “Balance transfer of a home loan means transferring the unpaid principal amount of the loan to another lender,” says Rishi Mehra, CEO, Wishfin.com. “You get maximum benefit if it’s done in the initial years of the loan tenure as the unpaid amount is maximum at this time.”

YOU SHOULD TRANSFER IF...

Existing lender is charging a higher rate of interest. If your existing EMI exceeds your monthly budget because of a higher interest rate, switching to a lower rate can help you save on the total interest payout.

You need extra funds. Transferring the loan to other lenders can help you get a topup loan.

Service at the existing lender is poor. If your lender is unresponsive to requests or is lax with the paperwork, you can switch to a lender whose services are prompt and professional.

You want to switch from f loating rate of interest to fixed or vice versa. If your existing home loan is linked to the base or fixed rate of interest and you want to switch to MCLR (marginal cost of fundsbased lending rate), you can transfer your home loan to another lender at a floating rate of interest.

Of course, all the above options include checking the feasibility of the transfer. One must factor in all associated costs and aspects, not focus just on the changed interest rate.

KEEP IN MIND...

“The lower interest rate carrot cannot be the only criteria for a borrower,” says Arun Ramamurthy, founder and director, Credit Sudhaar. “Other costs like processing fee (usually about 1 per cent of the loan amount), legal charges etc. must also be considered. These, if added to the overall costs, may not make the balance transfer as lucrative as it may seem.”

The Reserve Bank of India recently announced that all floating rate loans would be linked to external benchmarks such as the repo rate or the 91 days Treasury Bill or the 182 days Treasury Bill or any other benchmark set by Financial Benchmarks India Pvt. Ltd (FBIL) from April 2019. The external benchmarking will see frequent changes in interest rates; a borrower, therefore, should look for a lender who charges the least spread over the underlying external benchmark.

 HOW IT IMPACTS YOUR CREDIT SCORE

In a balance transfer, one longstanding loan gets closed and is replaced by a new loan, so it’s important to understand the impact the entire switching process has on your credit score. Mohan Jayaraman, MD, Decision Analytics at Experian Asia Pacific, says the “transaction per se is not considered derogatory and will not impact the bureau score substantially. But customers should request for an NOC from the bank and ensure the bank reports the loan closure to the credit bureau in time. Check if the information is correctly reflected in the bureau report”. Experts say the credit scores may experience a temporary drop. However, with timely repayments, the scores will come up again.

Amit Sethi (The author is a freelance writer)