Home loan transfer
Nikhil is in a dilemma! He is having an outstanding loan of 25 Lakhs from a PSU bank and the current interest rate is 12%. But SBI is now offering loans in the range of 10.25 -10.40%. His bank has not offered a similar rate so far. Nikhil is seriously thinking of switching his loan to SBI to avail the lower interest rate.
Please do a cost benefit analysis before taking a decision like this. Though there is no prepayment penalty on such transfers, there are other costs attached to it.
If your loan is not with SBI
With processing fee capped at 10,000, the current rate of SBI is the best available option now. But wait, your bank also may follow SBI.
If the difference between the new and old rates is very high, you should plan for a loan transfer. Switching makes sense only if the difference in interest is atleast 1 percent. Processing fee can’t be the sole determinant. You have to consider valuation charges, inspection fee, lawyers’ fee, stamp duty etc to get a clear picture and do a cost benefit analysis.
But try to negotiate with your existing lender before taking a decision for loan transfer. You can quote the SBI rate and try for a reduction in rates from existing lender. Many lenders are allowing reduction in interest rates to the existing customers on a case to case basis. They are even ready to reduce the conversion fee, if your track record is good and if the lender wants to retain you as a customer. But please check the revised tenure of the loan, after the EMI is reduced. The lender can reduce the EMI by adjusting the loan tenure!
If you are nearing the end of the loan tenure, transfer of loan will not help you much, because the interest component in your EMI is very small. You should also seek from banks their re-pricing policy and track record before switching banks. This will help you in taking the correct decision.
If your loan is with SBI
SBI is offering the lower rates to its existing home loan customers, provided they are ready to pay 1% conversion fee. If you migrate to this rate now, you will be eligible to avail the lower rates now as well as the thinner spread of 25-40 basis points over the SBI base rate, which will benefit you throughout the loan term. This option will beneficial for you if your loan amount is not very high. If your loan amount is high, it is better to wait for other banks to come out with a similar rate. You can opt for a balance transfer at that time and save on conversion fee. But you have to factor in processing fee in the range of 0.25 % to 1% depending on the new lender.
Select banks are offering lower processing fee and reduced interest rates, depending on your credit score. If your loan amount is high and if you are paying more than 10.5%, you must look for a loan transfer.
But consider all other related costs and do a cost benefit analysis before deciding.