Switching home loan to another lender?

Interest rates have been coming down in India over the past two years. Most lenders – Banks and Housing Finance Companies – have lowered their lending rates over this period.

While those applying for a loan can compare various loan providers’ rates and choose the lowest rate, what are the options for someone who has already taken a loan?

In the event that your lender has not lowered the interest rate on your existing home loan, you may consider shifting to a new lender. Here are a few points to consider before making your decision to switch:

Approach your existing lender:

The first step is to approach your existing lender before considering new lending options. Your existing financial institution may be able to offer you a better rate at a one-time switching fee.

The home loan market in India is vibrant, and it may be possible to transfer your home loan at a lower interest rate to a new lender, if your existing lender is not able to offer you a competitive rate.  

Interest rate benefits vs. Cost of shifting

There are costs associated with transferring your home loan. You will need to pay processing fees and other related transfer charges, along with the stamping charges for your new loan.

The switch cost typically varies between 0.5% and 1.5% of the outstanding loan amount. The decision to transfer would rely upon the residual tenure of your home loan, and if the interest rate benefit over the residual tenure is able to offset these costs.

Prepayment penalty

There is no prepayment penalty for individual floating rate home loans. In case you have a fixed rate loan, you may be required to pay the prepayment penalty on your outstanding amount. This should be factored into your decision making.

Clean repayment record

It would be difficult for you to transfer, in case you have defaulted on your re-payment of the present loan or any other liability in the past. In such a situation, your only option will be to stick with your existing lender.

Once you have made up your mind after considering the above points, approach the new lender to get a loan sanctioned.

During the switching process, the new lender may also offer you a top-up loan, which you may avail if there is any new financing requirement.

Do read the fine print to check if the new interest rate offered to you is not a short duration teaser rate. Understanding the terms and conditions is important, as they impact your eventual net financing cost.

In case there are any concerns or queries, raise them with your relationship manager and get them clarified.

Proactively managing your home loan may save you a significant amount of money in terms of the interest paid. The decision to transfer your home loan is an important step in doing so.

(The writer is President and Head of Retail Finance at Edelweiss
Financial Services)