Want To Switch A Home Loan?
When interest rates rises, the biggest problem lies with us is that the EMI or the tenure of the floating rate housing rate also increases. One option various lenders adopt is to ask existing borrowers to switch to their company, which might be offering a lower interest rate. But is the option worth considering? The answers to below questions might help you in taking a decision on this matter
When do lenders increase interest rate?
Generally, lenders – banks and non-banking financial corporation’s (NBFCs) increase interest rates immediately after the Reserve Bank of India (RBI) increases its interest rates. The time lag between lenders in increasing their (base rates) interest rates may be a maximum of one or two months.
For the borrower, the interest rate hike on a floating rate loan will rise if the base rate increases by 1% to 1.5%. This clause is normally specified in the loan agreement. So, if the RBI is looking to hike the rates upward as is happening now, almost all the lenders would have increased their applicable interest rates for existing borrowers or will do so within a month or two.
Switching the Loan Provider
So does it make sense to switch a loan provided who charges a lower interest rate, when the interest rates are rising? The answer is “NO”.
This is because the new loan provider is anyway going to increase the loan interest rate shortly. In addition, for switching one has to pay exit charge from the existing loan provider and also the loan processing fee to the new lender. Therefore, one has to, within a month or two, get back to the increase loan burden and in the meantime spend a lot in processing fees too.
However, it makes sense to switch to a lower interest rate when the interest rates are going down. Even here, one has to carefully assess the interest rate scenario, understand the extra charges involved, and wait for rates to stabilize etc. before switching.
Need to Read Loan Agreement Carefully
The decision to switch or not to switch thus needs to be evaluated by reading loan agreement. Ask for the agreement copy before you sign an application. All loan providers are obliged to provide the loan agreement copy before the formal signing of the application form. Analyze the agreement to assess whether specific loan change saves any money.
Switching home loan does not make sense but it always help if you wish to prepay your loan amount periodically as this directly reduces the principal and will effectively reduce your interest cost, which will help in closing loan quickly.
It is not a good move to look at switching loan providers in a rising interest rate scenario as an option to escape the interest rate hikes. The obvious reason is that every loan provider will increase the interest rates sooner than later. Whether a loan provider promises a longer reset period has to be checked in the loan agreement before taking a decision on the loan switch after factoring in pre-closure charges, if any, as well as the processing fee.