With All-Time Low Home Loan Rates, Does It Make Sense To Switch Your Home Loan Lender?

The Indian economy has been witnessing a falling interest rate regime since last year. And the segment to which this has brought the most cheer is home loans. At present, home loan rates are at all-time lows for many banks and HFCs (Housing Finance Companies), with most of them offering under 7% p.a across varying loan amounts, tenures and applicants¡¯ credit profiles.

With such low rates on offer, it's natural for prospective homebuyers to turn their dream of owning a home into reality by taking the helping hand of home loans. But the cheer is not limited to just them. Even the existing borrowers who are serving their home loan EMIs are eyeing these low and lucrative rates. After all, who does not wish to lower their home loan burden, especially given the fact that it's probably the biggest financial commitment we make in our lifetime, and home loan EMIs occupy a significant part of our monthly income.

So if you, too, are amongst the existing home loan borrowers scratching their head in contemplation of grabbing the low rates through a balance transfer, just pause and read on as we explain whether it makes sense to do so, and what all you need to keep in mind before switching home loan lender.

1.First approach your existing bank/HFC for negotiation

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Before you put forth your bid to hop onto the low and lucrative home loan rate by going for the switch, first enquire with your existing bank/HFC with which you are serving the home loan repayment. Put forth a request to lower the interest rates and be at par with those being offered by other lenders as per your loan amount, credit profile and tenure. If your lender refuses to accept your request, then you can consider going for a balance transfer to switch to another bank/HFC.

All this makes sense also because your home loan balance transfer request is considered as a fresh loan application by the new lender, so you may have to once again go through steps such as loan evaluation, property evaluation, documentation and other processes associated with a new home loan application. And since all these steps tend to involve significant time and effort, it makes sense to first enquire with your existing lender for negotiation and then upon refusal, you can go ahead with the balance transfer.

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2. Check for savings in overall interest cost

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More often than not, the primary aim behind most home loan balance transfers is to bring down the overall interest cost of existing home loans, more so in the case of home loans availed at much higher interest rates. By going for a balance transfer, you can lower your overall interest cost on the home loan without compromising on your liquidity and existing investments, unlike the case of prepayment wherein you get to lower the interest cost by making payment through your savings or surplus funds, which tend to impact your liquidity. So, availing of the balance transfer option turns out to be a smart move, especially for those existing home loan borrowers who now become eligible to fetch home loans at much lower interest rates from other lenders, due to reasons such as improved credit profile.

However, as mentioned before, your balance transfer is considered as a fresh home loan application by the new lender. Hence, charges such as processing fees, administrative charges etc. tend to be usually levied by the new lender at the time of processing your balance transfer request. So, go ahead with the balance transfer option only if the overall saving in interest cost is significant enough after factoring in the associated costs involved.

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3. Factor in your residual home loan tenure

Another crucial parameter to factor in when going for a balance transfer is your remaining home loan tenure. Going for a home loan balance transfer during the later stages of your home loan tenure would not be of much significance for most of you, as you must have already paid the majority part of your interest component during the earlier stages of the tenure itself, hence implying that there is a relatively dimmer scope of availing significant savings in total interest cost during the later stages of the home loan tenure.

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4.Act wisely when selecting the tenure post balance transfer

In case you happen to be in the initial stages of your tenure and can extract significant savings in interest cost, you need to be clear regarding one decision that your new lender will ask you for - whether to keep the tenure the same as residual tenure after balance transfer or change it. In such scenarios, a lot of home loan borrowers tend to get carried away upon seeing the EMI amount get lower when the tenure gets elongated, and hence they end up opting for a longer than remaining tenure for the home loan after the balance transfer. That's where they go wrong.

When the primary aim behind balance transfers is to lower interest cost, elongating your tenure would increase your interest cost, hence defeating the purpose of the balance transfer! The extension of tenure would only make sense if your aim is to lower your EMI amount, despite having to pay higher total interest costs.

Otherwise, if the aim behind the switch is interest cost-saving, it¡¯s better for you to keep the repayment tenure of the new home loan post balance transfer the same as the remaining tenure of the existing home loan. Whereas if you aim to lower the EMI amount post balance transfer, you may go for a longer tenure, if available, but try making prepayment whenever you have surplus funds, as this can help lower the interest cost.

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Summing it up - Does it make sense to switch?

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Besides all this, another thing to remember when thinking of grabbing these low and lucrative home loan rates is that these are variable and not fixed in nature, implying that your interest rate and subsequently the EMI would keep varying during the tenure. That's why the importance of switching only upon having a well-thought plan and taking the above-mentioned steps, is emphasized upon. It would only make sense to go for the switch through balance transfer if the savings on the overall interest cost is substantial, which in itself would also be possible in the initial years of the home loan tenure rather than the later years when most of the interest component has already been repaid by you. Apart from these two aspects, other reasons for opting to switch can be - when you are not satisfied with the lender's service, like refusing to change the home loan tenure or lower the interest rate or refusing to accept your top-up home loan request. Whatever the reason is, make sure your financial health benefits instead of getting harmed upon changing your home loan lender.

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