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Refinancing or Switching your existing home loan to another bank is also known as a Balance Transfer. In a Balance Transfer,your outstanding loan is transferred to another lender of your choice by confirming to their rules and regulations. There are many reasons for which people opt for switching the lender,of which the following are the most common ones:
To lower Interest Rates: Suppose,you have taken a home loan from a bank two years back and if the interest rate in the market has become lower now,it may not make economic sense for you to continue paying a higher EMI. You do have the option to apply for a refinance with a new lender.
Additional Money Requirement: From the time you originally took a home loan,the property of the value might have appreciated. If in case the existing lender is not flexible to offer you top up loans for your additional money requirements like house renovation or interior designing or for some other such purpose,refinancing will be a good choice,if the new lender is willing to give you a top-up loan against the rise in the property value. Rarely,service issues and accessibility conveniences may also prompt people to switch their lender.
The way Balance Transfers work is that the new lender pays the outstanding amount of your loan account to the old lender as per the date of request for closing the account. Once the transaction is over,your property documents will be handed over to the new lender,the remaining post dated cheques / ECS will be cancelled and your liability is shifted to the new lender.
You will be charged a pre-closure charge by the existing lender which could be anywhere between 2 to 5 per cent of the principal outstanding of the loan at the time of refinance. Pre-closure charge compensates the lender for the loss of interest payments that they would have earned,if the loan remained with them. But if you are paying the outstanding amount from your pocket and refinancing it soon after,there are chances to waive off the pre-closure charges. You are also required to pay a loan processing fee with the new lender as in any other cases which will come 0.5 to 1 per cent of the loan applied. Many banks restrict the processing fee to a maximum of Rs 5,000.
So,remember that refinancing a loan should still make sense for you after you pay the pre-closure charges to your existing lender and the processing fee to the new lender. So one should go in for a refinance only after careful planning and calculation,whether with these initial expenses,it would help to save significant money.
For example,if you have Rs 20 lakhs outstanding in your existing loan and 15 years remaining on the loan tenure. While prepaying the loan you need to pay 3 per cent pre-closure charge which comes up to Rs 60,000. And,to the new lender you are paying a processing fee of Rs 5,000. So the total expense comes to Rs 65,000.
Taking an assumption that your current interest rate is 11 per cent,the above table may help you to compare how much you are saving if you are switching to a new loan with an interest rate of 10 per cent and 9 per cent.
So,if you are switching from 11 to 10 per cent you can save around Rs 2 lakh on the whole after deducting the penalty charges and processing fees. Its important to note that refinancing is economically viable only if the saving seems like a significant amount to you post these expenses. It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due during the latter part of the tenure which will not make sense for the switch.
While applying for refinance,confirm with the new lender that the low interest rate is not a teaser rate which will be contractually rising after a stipulated time frame. Also,ensure that your paper work,especially the property ownership papers,reach the new lender on time. Some banks hand over the property documents on receiving the cheque from the new lender. For some others it takes some time to deliver the documents. Be clear with these terms of both banks. If the papers are not in order,the disbursement can be delayed. During this transition time if the borrower unknowingly stops paying EMIs to the existing lender it creates an unintentional bad credit record. Similarly,one must go through the loan agreement with the present bank and be aware of all the clauses and requirements to avoid any discrepancies later.
You need to submit a letter to the existing lender requesting a loan transfer. Based on your request,the bank will give a consent letter / NOC and a statement mentioning the outstanding amount,with which you can approach the new lender for refinance. A minor hiccup that can happen is that banks do not release the required property documents until the loan is paid in full. At the same time,the new lender some times would not pay the loan till they receive the original documents. In this situation,a statement needs to be obtained from the previous lender,stating that the documents would be dispatched within a certain time frame. The Reserve Bank of India has frowned on the practice of banks slapping charges in the form of prepayment penalty. Banks have also accepted the RBI proposal to pass the benefits of floating loans to the existing customers who have been paying the higher rates. So,before transferring your home loan,get information from you bank on this and see if its possible to move to a better interest rate with the same lender itself.
Transferring a home loan is not simple,but if you get a good deal,which would really help you to save its always good to go ahead.
Author is CEO,BankBazaar.com
