In the competitive world of home loans, finance companies keep churning out attractive offers to exciting more people. This strategy results in the reduction in interest rates and the addition of many other exciting features that reduce the customer’s burden of repayment to a greater extent. That’s why existing borrowers prefer switching to a more beneficial scheme.
Home Loan is a huge commitment, and even a small variation can cause a vast effect. Here are some of the most important points that you must check before switching your home loan.
Repayment Tenure left: The best time, to switch to a lower home loan interest rate is as early as possible in the tenure period. If you switch the loan when less than five years of repayment are left, then it will be considered pointless.
Prepayment Penalty: Most of the Housing Finance companies charge a prepayment penalty on switching loans. Reserve Bank of India has currently removed this for floating interest rate loans, but it is still valid for fixed interest rate loans.
Additions to Balance Amount: You must analyze the additions made by the new bank to make the balance amount more than the existing loan or not.
Illustration
Let’s assume the case of an existing borrower who has taken a loan of Rs 30 Lacs for the tenure of 20 years at 14.65%. He is paying an EMI of Rs. 38731. After paying for three years, a new bank offers him the home loan at 10.75%. Now he has to pay an EMI of Rs 31065 for the remaining 17 years. In this case, a borrower has to pay a prepayment penalty at 2% for the old bank and a processing fee of Rs. 1000 to the new bank in this switching process.
Analysis:
Extra fees paid : Rs 58000 =(Prepayment Penalty) + Rs. 10000( Processing fees) = Rs 68000
The difference in the EMI: Rs 7666
Net saving over 17 Years: Rs 15.63 Lacs
Net Saving after deducting the extra fees paid for the switching process: Rs 14.95 Lacs.
Thus, it is clear that the net saving over the next 17 years is going to be a considerable amount for the borrower if he chooses to switch after three years. But if the switch is made after ten years then benefits will come down drastically.
