Currently, the home loan interest rates have been reduced, and this has made many to switch their home loan to a lower rate of interest. But this is not the only thing which one should consider while switching their home loan.
When a borrower approached the lender to close this loan account as he is going to switch it for a lower rate. The lender agrees to transfer the loan, but that is only allowed by paying a transfer fee and a pre-closure fee. These charges are applicable with a majority of lenders. So, as a borrower, how should you tackle this situation? Should you Switch Your Loan to a Lower Interest Rate by Paying a Fee? Let’s analyze this!
Home Loan Interest Rates
India’s top lenders including State Bank of India, Kotak Mahindra Bank and Axis Bank, Bank of Baroda and many others have recently reduced the home loan interest rates as per the RBI advisory. Many lenders are even offering festive discounts on home loans. All this has made the home loan interest rate all-time low. These offers include reduced interest rates, discounts on processing fees and some special offers for women buyers.
Home loan interest rates are at a 15-year low.
All this has forced existing home loan holders to consider home loan transfer. This is to avail more benefits which include a lower rate of interest, and other favourable benefits. The switching of an existing home loan is possible with either a new lender or you can also remain with the existing lender and opt for a new plan.
But, is it a good idea to pay the pre-closure charges or transfer charges to switch your home loan?
You pay the switching fee and reduce the loan tenure by a few months/years. On the new loan, by paying less on the interest you can save some amount on the interest in the first year. So, generally, it will take a few months or about 1 to 2 years to recover the switch/transfer fee. This is a very critical calculation. So, here it becomes important to calculate the difference between the saved amount and the fee you are paying towards the closure/transfer.
If you really want to switch, switch it only when-
- You are getting the new loan at a remarkable interest difference.
- When you can save even after paying the transfer free.
- If you are going for a reduced tenure- then also it’s important to calculate how much you are saving.
- Go for the transfer only when you are able to save a decent or remarkable amount.
- If not continue with the same lender.
Part-payment an option
The transfer fee which you will be paying to your existing lender and the processing fee which you will be paying to the new lender can be saved and used to part prepay the loan. Paying this will reduce your outstanding loan amount. This can further reduce your EMI or your tenure period.
So, if you are thinking about switching your home loan you need to consider this as well based on proper calculations.
To conclude: You can go for the switch only if you can save a decent amount. However, before you switch, Checking, and comparing all the available options in the market is a must. Your decision should always be based on calculation, not on theories.