Interest rates for home loans have experienced a dramatic rise since last year, escalating the EMIs on home loans, specifically for home buyers who choose floating interest rates. As expected, most of them are taken aback by the effect increasing interest rates on their monthly expenditure. Furthermore, many financial institutions are thinking to further toughening the home loan interest rates in the coming months.
Financial connoisseurs always advise that the home loan seekers should always keep their EMIs within manageable limits. This means that if you are going for a bigger home loan amount then you can pre-pay the loan, bargain with the bank to offer you better interest rates or even try and stretch the loan duration so that you can maintain your monthly expenses.
CHANGE THE FINANCIAL INSTITUTION
You can opt for home loan refinancing or balance transfer by changing to another financial institution or bank in order to get a better deal. Home loan seekers normally have complains about the banks being unfair to them as they raise the floating home loan interest rates in the tough interest rate situation, but are not keen to reduce the interest rates when the rates have toned down. However, many loan seekers are not interested in changing their financial institution or the lender.
The home loan borrowers who have taken loans before June 2008 have seen interest rates rising to 12-13%. “Many borrowers who have taken loans prior to June 2008 would have seen their rates touch 12%-13% now. These borrowers should specially go for the option of changing their financial lending vendor.
The financial institutions are also keen to take over the existing home loans by proposing a lower interest rate to lure borrowers. Although the balance transfer will surely decrease your EMI installments but there is no one-size-fits-all key for everyone. To understand whether changing the lender will help you out or not you need to analyze the complete situation and calculate the exact benefits that you will derive from it before deciding anything.
DO THE BASIC WORK
First step in this process is to do a research on home loan interest rates applied by other financial institutions or banks. The rates are available on the web portals of all financial institutions or banks. This research work will actually help you out in getting the best deal, i.e., you can get a better picture about the bank that is willing to charge a significantly lesser interest rate after taking over your home loan.
Transferring the balance can only be beneficial for you if the interest rate difference is at least 1.75 to 2.00% points.
Though, a home loan is a long duration debt, so even half-a-percentage point would make a lot of difference in the long run. For that reason, the duration left for the original loan will play an important part in deciding whether to change the financial institution or not. The bigger the loan tenure is remaining, the more will be your total savings. If you just have 3-4 years left to repay your loan then changing the lender will not make any difference for you but if the remaining tenure is around 13-14 years then switching the financial institution will be helpful in the long run.
CHARGES AND FINES
You also need to consider the pre-payment fee that is payable in name of the existing financial institution.
Most of the financial institutions do away with this fee if the prepayment is made by the borrower’s own account. Hence, you will be charged with a penalty in case of balance transfer for the existing home loan.
Normally, most of the financial institutions or banks levy around 2% of the remaining home loan amount as pre-payment penalty. This can turn out to be a considerable amount especially when the remaining home loan amount is sizeable. It could turn out to be a significant amount, particularly if the outstanding balance is huge. Though it is a one-time payment, but you need to check the impact it will be making on your total savings in order to calculate the actual benefit attained.
Though, many home loan seekers are not aware that the financial institution or the bank which is taking over the loan also finances the prepayment penalty cost. So the fear of paying a huge amount as the penalty should not restrain you from going for a balance transfer.
Along with this you also need to take into account the processing fees that the new vendor will be charging you for refinancing the home loan. Most financial institutions or banks levy 0.5% of the total home loan amount as processing fee.
COST-BENEFIT EVALUATION
If you have decided to change your home loan vendor then the first thing you need to do is to evaluate your total savings during the complete duration of the home loan period. In simple words, you need to calculate savings on interest expenditure subtracting processing fee that you need to pay to the new opted financial institution along with the prepayment penalty.
THE PROCESS
The process to change the financial institution or the bank is moderately easy. The home loan seeker needs to comply with the norms laid by the new bank for credit-worthiness and repayment capacity.
Once you meet the conditions laid down by the new bank, the property-related papers will be handed over to the new lending financial institution by the old one prior to the outstanding payment is made in the name of the latter.
The borrower’s role in the transfer process is limited but you should all the loan and property-related documents in place. If in case, the previous financial institution fails to give some original documents to the new bank then you should always have photocopies of the same available with you.
Hence if at any point of time you feel that you are wedged with your current home loan provider in spite of economical options existing in the market, then you can surely consider the option of switching over the financial institution or the bank.
Calculate all the fees and penalties, bargain with other financial institutions and you can lucratively cut down your EMI installments regardless of the increasing home loan interest rate situation.
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