In the current interest rate scenario, with some banks reducing their home loan rates and others deciding to wait before taking the step, more and more borrowers are considering switching their home loan from their existing bank to a bank that has a more attractive offering.

In our continuing endeavour to help our valued readers make the most of their personal finances, we at PFN have put together a quick and easy guide for you to go through if you are looking to take the leap.

(You can read our article titled 8 Things to Know about Home Loans to help you get started)

Home loan rates currently range from 10.50% and 10.75% from lenders such as SBI, BoI, Central Bank of India, Syndicate Bank, PNB and Axis Bank to name a few, all the way up to 12.50%, 12.75% and even 13% plus on the higher side from lenders such as Lakshmi Vilas Bank, Tamilnad Mercantile Bank and others. For example, a home loan of above Rs. 75 lakhs for more than 10 years from Dhanalakshmi Bank will cost you 13.25% interest per annum, as per the bank’s website.

So if you are on the higher side of this bracket you can definitely consider your options:

1. Approach your existing bank and ask for a rate cut in line with what is offered to new borrowers. You can use your credit score as a bargaining chip provided it is strong, and one thing that always works is to indicate that if rates are not reduced, you have the option of switching to another lender.
   
   Remember, the bank would rather keep you as a borrower and earn a little less interest from you, than lose you as a borrower and therefore earn no interest from you at all. (Know more about your credit score with our Comprehensive Credit Report Guide).
   
   
2. If this doesn’t work, you can shift to a more amenable lender.
   
   

If you decide to shift, there are some things you need to know.

The Thumb Rule

Firstly, the underlying hypothesis in shifting your lender is that if you switch early enough or to a bank that offers a low enough interest rate, the shift will be worth it in terms of money saved over the remaining home loan tenure. The earlier you prepay, the more you save on interest, the better

A broad thumb rule is, opt for balance transfer (i.e. shifting to a new lender) if you have at least 8 to 10 years left on a home loan that is 15 to 20 years long), or if the difference in the new rate and the old one is at least 1% per annum. Shop around with various lenders to see who will give you the best offer. Keep in mind that the new lender will want to assess your repayment history, so it might help to have your EMI statements at hand.

No Prepayment Penalty Anymore

Secondly, note that it is now illegal for a bank to charge you a prepayment penalty. In October 2011, the Reserve Bank of India asked all banks to do away with prepayment penalty, that is the penalty you would incur if you chose to partly or fully prepay your home loan.

Most banks have gone ahead and complied with the directive.
Specifically, on ICICI Bank’s website is the following statement: "no prepayment charge on floating rate home loan irrespective of the source of funds". This move from ICICI came shortly after SBI’s move to abolish prepayment penalty on both fixed and floating rate home loans for all their customers, irrespective of whether they were prepaying from their own funds or from funds borrowed from a new lender. Many banks followed suit and now almost all banks will not charge you a prepayment penalty if you decide to switch to another lender.

(Read our article titled Home Loan Dilemma: To Prepay or Not to Prepay)

Please Waive my Processing Fee

Banks charge in the range of 0.5% to 1% of the total loan amount you are applying for. It is possible, with hard bargaining to get the new lender to waive or at least reduce the processing fee. If you are approaching two new lenders, and Lender A agrees to reduce or waive the processing fee, you can use this fact to get Lender B to do the same.

There are also some banks such as Axis Bank and HDFC Bank that in some cases waived their processing fees altogether. It might take some bargaining but it is very possible. Look for this kind of deal if you are planning to opt for balance transfer.

Procedure and Documentation - No Hassle if You’re Prepared

1. Talk to your Existing Lender
   The first step in this process would be to talk to your bank. Write a letter indicating your intention to switch and stating reasons for your discontent. It can be as simple as ‘I find the rate of x% to be too high and am seeking a lower interest rate at parity with what is offered to new customers i.e. y%’. Once you send your existing bank this letter, they should contact you (if they don’t, you can contact them to hurry the process along) for a round of discussion and negotiation.
   
   
2. Get the Consent Letter
   If the deal you can avail elsewhere is better than what your existing bank is prepared to offer, then your existing bank has to issue you a consent letter. All that this means is that you have had a word with your existing bank and they have given the go-ahead for you to shift from them to a new lender. When this happens, you should ensure that you get a foreclosure statement, account statement and list of property documents from your existing lender.
   
   
3. Documentation for the New Lender
   Once you get the consent letter, you can approach your new lender for the balance transfer. From here onwards, the process is largely the same as taking a new home loan. You have to fill an application form, provide the necessary original documentation such as:
   
   
   1. Photo Identity Proof,
   2. Passport Size Photographs,
   3. Copy of your PAN Card,
   4. Address Proof,
   5. Proof of your Age,
   6. Last 6 months bank statements,
   7. Copy of the Property Title Deed,
   8. Form 16 for the last 3 years (for salaried persons),
   9. Last 6 months salary slips (for salaried persons),
   10. Copy of IT Returns of last 3 years (for businesspeople / self employed people),
   11. Copy of audited Balance Sheet & P&L statements of last 3 years (for businesspeople / self employed people)
       
       

The new lender will conduct a credit appraisal, a field investigation and sanction the loan. They will provide you with an offer letter at which time you can submit all the necessary legal documents for a legal check by the new lender. Once the documents check out and the agreement is signed, the new lender will issue a cheque disbursing the balance loan amount to the old lender.

And that’s that.

The main thing to ensure is that the property ownership documents are ready for the new lender, so that the process does not get delayed. This might take some follow up, and the more frequently you follow up, the sooner it will get done.

Conclusion

Home loans are the biggest liability you will ever take on in your life. If you find that your lender is slow to reduce rates while others are quicker, or your lender has higher rates than others, and you still have a significant portion of your home loan tenure remaining, opt for a balance transfer to save your hard earned money and finish off your loan quicker.

Also remember, this kind of loan should never go uninsured. You don’t want to put your family in a situation where the loan devolves onto them in case of an unfortunate event, because of a lack of sufficient term insurance. So be sure to insure yourself properly. You can use our Human Life Value calculator to see how much insurance you require.

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Comments
ethan2@sandiegoemails.com Mar 06, 2012 Before any decision, there must be a proper Financial Planning Education. Maybe, when you are going for a new lender, the old lender may have already charged you for that month. And if only 2-4 years were remaining for loan, you realize that it was not worth the money saved compared to time spent. This planning is very important.
homes@teamelitehomesales.com Mar 24, 2012 Dear Ricardo:There are two answers to this qtoiusen, depending on your age and assuming that your interest rate is fixed. If you have a variable rate of interest, then research what the rate would be if you converted to a thirty-year fixed rate mortgage, which, at least in California is about the same, and make the switch so that you will not be subject to interest rate fluctuations. The closer your fixed rate mortgage rate is to your variable rate of interest, the more sense it makes to invest the money, again assuming time is on your side. As a general benchmark, if you are more than 10 years or more away from retirement, with such a low interest on your home loan, investing makes more sense. The reason for this choice is that the effective interest rate on your home loan is about 4.5% since the interest you pay on it is deductible from your federal income tax return. If you also pay state income tax, your effective interest rate on your loan is even less. Long term, the S P 500 has returned about 10%, which after tax, is about twice the rate you would earn by paying off your home loan. Other important caveats in this choice are how much in total investable assets do you have available to you, your risk tolerance, and your level of investment expertise. Finally, before investing any money, you should be sure that you have set aside in a non-risk investment about three months of living expenses. If you employment is tenuous, then the amount of money set aside should be greater. Finally, if you do invest, and have earned income (meaning from employment), take advantage of any retirement plans available to you, such as a Roth IRA and your company’s 401(k). The reason for making this choice is that there are tax and other possible benefits available in these plans that will enhance your rate of return. As just one example, if your employer offers a 401(k) where they match your investment on a one-for-three basis (meaning they put one dollar in your retirement plan for every three dollars you set aside), you have a 33% on those monies, so you could just put your money in a zero risk investment and have a great return on your money. The amount you can put aside in a retirement plan is limited, so you will have to have other alternatives available to you for the balance of your investable assets.The closer you are to retirement, the more sense it makes to reduce your mortgage. The reason is that the return expectation in the short run is much more problematic than it is in the long run. However, I would still keep aside some percentage of your assets in a savings account or Certificate of Deposit for emergencies. Matt(About 23 years as an investment professional.)

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