In the competitive world of home loans the customer is the king as finance company keep churning out more attractive schemes to woo more people into their fold. This has witnessed a reduction in interest rates and the addition of several other beneficial features that can actually reduce the burden of repayment to a great extent. In such a scenario many of the existing home loan borrowers prefer to switch to more beneficial new schemes. However before making the switch one needs to put in certain amount of analysis regarding the actual viability of such a move.
Considerations before Balance Amount Switch
The home loan is a long term commitment and even small variations will have huge cumulative effects over a long period of time. Here are some of most vital aspects that need a closer while deciding to switch the loan.
- Repayment tenure left: Ideally the best time to switch to a lower interest rate loan is as early in the tenure as possible. The benefits of switching the loan when less than 5 years of repayment is left is negligible and hence considered pointless.
- Prepayment Penalty: Most of the HFCs charge a prepayment penalty on switching of home loans in between the repayment tenure. This has currently been removed by RBI mandate for floating interest rate loans but still valid for fixed interest rate loans. In the case of the latter, the borrower needs to calculate the benefits expected against the additional payments that are made in the process in order to arrive at the right decisions.
- Additions to Balance Amount: one needs to analyze whether the additions made by the new bank on account of paying up the prepayment and transfer charges make the balance amount more than existing old loan or not.
Illustration
Let us assume the case of a borrower who had taken a home loan of Rs. 30 Lakhs for tenure of 20 years @ 14.65% which required an EMI of Rs. 38731. However after paying for 3 years (36 EMIs), a new bank offers to take over the home loan @ 10.75% interest getting the EMI on the balance amount to Rs. Rs 31065 for the remaining 17 years. The borrower in this case has to pay a prepayment penalty @ 2% to the old bank and a processing fee of Rs. 10000 flat to the new bank in this switching process.
Analysis:
- Extra fees paid: Rs. 58000(Prepayment penalty) + Rs. 10000(Processing fees) =Rs. 68000.
- Difference in EMI: Rs 7666
- Net savings in EMI payments over 17 years: Rs. 15.63 lakhs
- Net savings after deducting the extra fees paid for switching : Rs 14.95 lakhs
Thus it can be easily seen that the net savings over the next 17 years (204 EMIs) is going to be a substantial amount for the borrower if he chooses to switch after 3 years (36 EMIs). However the benefits will come down drastically if the switch is made after 10 years (120 EMIs) with another 10 years (120 EMIs) remaining.