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Thursday, June 20, 2013

Switching to another lender may ease your home-loan burden

Home loan customers have been watching the Reserve Bank of India's (RBI) policy reviews very closely for some time. Every quarter when the central bank is ready to review its key policy rates, those paying 11-13% interest on their home loan would ask expectedly: Will RBI cut rates this time? Will banks cut rates on home loans? This Monday was no different, and RBI's decision to hold rates once again disappointed many. However, after the policy review, many of them are looking at ways to ease theirinterest rate burden as it looks highly unlikely that the banking regulator would cut rates in a hurry. And at the moment, say experts, they don't have much option other than proactively scouting for better deals in the market and switch to a lender who will offer a lower rate. 

"Those who are currently paying an interest rate of 12-13% should certainly keep an eye on lenders offering a cheaper rate. In fact, even a difference of 50 basis points can result insavings of Rs 1,700-2,500 per month, as the average ticket size for home loan in Mumbai would be more than Rs 50 lakh," says Rajiv Raj, co-founder and director of creditvidya. com, a credit counselling firm. Check the rates offered by various banks and compare the rate with the interest you are paying now to get a better picture.

"If borrowers are currently paying anywhere close 10.75-11%, they can consider moving to lenders who are charging 10.15-10.25% at present," adds Vipul Patel, director with loan consultancy firm Home Loan Advisors.

"A reduction of 50 bps can knock off 6-10 EMIs from your repayment schedule, depending on your tenure and rate. This is bound to translate into substantial savings."

Remember that since you don't have to pay any pre-payment penalty anymore on floating rate loans, the only additional cost you would incur on transferring your loan would mainly be the processing fee. Even here, you can negotiate with the new lender and ask for a waiver, or at least, concessional charges.

"If your credit score is over 750, which is considered desirable, lenders are usually willing to accommodate your requests and offer better deals," adds Raj. However, before taking a final decision on the new lender take a close look at his (as well as your current bank's) track record in reducing rates in tandem with RBI.

"Even when the central bank has reduced policy rates in the past, many banks didn't pass on the benefit of lower rates to their existing borrowers. This is probably the only sector where existing customers are given a raw deal when compared to newer customers.
In fact, they should be given loyalty rewards in the form of lower interest rates. Yet, banks continue with the discriminatory practice of wooing newer customers with lower rates, while keeping the rates for their existing borrowers unchanged," says Harshvardhan Roongta, CEO, Roongta Securities. However, these banks have been very proactive when it comes to raising rates for the existing borrowers.

If you have noticed that your current bank, like many others, follows this pattern, you have to find an immediate way out. However, if you find the new bank you are going to shift to also follows a similar path, you need to rethink your decision. Before making the switch, however, attempt to negotiate with your current lender.

"There have been several instances where the banks have agreed to re-price the loan when the borrowers expressed their intention to shift to another lender. They could levy a 'conversion' fee of 0.5-1% of the loan amount for re-pricing the loan. In case the difference between the new rates offered by your existing lender and the new lender is not huge, you could consider opting for the conversion route. It will help you avoid the paperwork involved in entering into a new home loan contract," suggests Raj.

Also, while choosing between balance transfer and conversion, do take into account charges like stamp duty, inspection and valuation fees that your new lender might levy.

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