Doesn’t it feel like a jab in the ribs when your colleague, who has recently purchased a home, is shelling out less interest than you are paying on your five-year old home? The first thing you want to do is sit with multiple tabs on your Internet browser and re-evaluate your options.
So you zero in on bank Y, which is offering better rates than bank X. Logic says you should plan on porting, or in layman’s terms ‘switching’, your home loan to the bank offering the lower rate. However, keep in mind that you will have to cross a few speed bumps before you make the switch.
1. The not-so-obvious Hidden Charges
Good news – RBI has directed banks to do away with the prepayment penalty on home loans with floating interest rates. Bad news – you still have to pay processing fees, franking charges, notarization charges, and the insurance premium.
What is even more disheartening is that the insurance premium you paid with bank X may not carry over to the new loan.
When you approach the new bank, ask for a waiver or discount. Most banks will do so to acquire new customers. Nonetheless, like the voice in the TV ad says, “read the documents carefully”.
2. Don’t Fret, Interest Rates will Fluctuate
Banks set a base rate or a prime lending rate and home loan interest rates are set against this base rate as a benchmark. In some cases, it will be more than the benchmark rate and in some cases it will be less. This is mostly based on RBI guidelines, market conditions and the bank’s strategy to acquire new customers.
For example, at the time of availing the loan, you may have come to an agreement with the bank that you will pay 1.5% less than the base rate. So if the prevailing interest rate is 14%, your home loan interest rates will be at 12.5%. However, a little while later, person ABC may get a loan from the same bank at 2.5% less than the base rate. This means ABC will end up paying 1% less than what you are paying.
This will be a never ending game based on market trends and it is best not to be disheartened by what you are paying. Hey! There are probably many people out there who are paying more than you!
3. Refinance is an option too!
In the case of fixed interest rates, there will be no changes in the interest rates, but in the case of floating rates, the amount you shell out to the bank will vary on a yearly basis. Sometimes the variation could also be monthly as the base rate varies according to the dips and swells in the financial market.
The ray of hope is that banks don’t like losing out on customers (who does?). Hence, many banks offer their existing customers the option of paying a conversion fee and refinancing their existing home loan. However, banks do not go tom toming about this option to their customers. As a matter of fact, many banks may not even offer this choice.
4. Get your paperwork right, the first time
Let’s face it. We are a generation of auto logins who don’t even have the patience to fill in passwords. So imagine the truckload of paperwork awaiting your attention while porting your home loan to a new bank.
Not only will you need to have all your paperwork in place, you will also have to furnish a statement to bank Y explaining why you are availing of a new loan from them.
Banks, as a rule, do not like to make frequent adjustments to EMI or tenure. The connected ECS adjustments require even more paperwork. This may take up most of the weekend and turn your popcorn-and-movie-marathon weekend into a pile-of-endless-paperwork nightmare.
5. Are you a good bet for the bank?
Remember that bank Y may not welcome you with open arms without a little recheck even if your loan has been approved by your current lending bank.
You could be switching your loan account because the builder has not delivered the apartment/home on time or work has stalled and you need an extension. But Bank Y may be hesitant to finance a dubious builder.
Also, if you have already repaid a hefty chunk of the loan amount, bank Y may not gain much from acquiring your account. It may consider you a risk not worth taking on after all.
6. Beware of the Reset Clause
Even in a fixed interest rate loan, banks sometimes include something known as a reset clause. The reset clause allows banks to review rates at the end of a certain number of years.
For instance, if the interest rates are rising, a bank may invoke the reset clause, which allows it to revise the rates on your fixed rate loan. In most cases, you will not be able to remove this clause from your initial loan agreement. Your best choice is to look for a bank that does not include this clause in their loan agreement.
These are some of the important hurdles that you need to take into account while thinking of porting your existing home loan to another bank. However, these are not insurmountable hurdles and can be addressed with a little forethought, lots of patience and meticulous planning.
AGM- Finance & Accounts – Completed B.Com from Karnataka University , Dharwad and completed CA intermediate course from ICAI New Delhi. Having 20+ yrs experience in the field of Audit , Finance & Taxation having vast experience in handling individual taxation matters