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All that you need to know about transferring your home loan outstanding


All that you need to know about transferring your home loan outstanding

  • By Saral Credit
  • June 24, 2021

A home loan comes with its own share of satisfaction and complexities. On one hand staying in one’s own adobe brings in pleasure and sense of achievement; the large ticket loan that needs to be serviced over a substantially long term adds to stress on the other hand. There is no doubt that a host of considerations are taken into account while picking up the loan, the same is not the case while the borrowers switching the loan. With the home loan rates plummeting to a level beyond the memory when such rates were offered by the housing finance companies, there is a rush to get the loan switched or transferred as it is commonly called.

However, this decision has to be taken in light of a few critical elements. A transfer without adequate assessment can lead to financial loss as against the assumption of the switch aiding the cause of saving. 

Read on to know more about how to go about evaluating your home loan switch. But, first and foremost, you need to get some insights into the home loan construct that you may already be running or might take in future. 

The Loan Term 

A large proportion of the home loans are disbursed with a longer term. Usually between 15 to 20 years of repayment tenor is what the home buyers prefer. This loan tenor is the first and foremost important factor that one would need to take into account while evaluating the switch option. To have a better clarity, you need to understand the construct of the home loan repayment. Let me share a graph with you. I highly recommend that rather than having a cursory look, try to evaluate the graph before going through further post.

Following are the key highlights of the above graph:

  • Loan credentials are as follows:
  • Loan amount – Rs 50,00,000
  • Loan term – 20 years (240 months)
  • Rate of interest – 8%
  • The misconception among the home loan seekers is that the money being paid to the housing finance company is equally divided between the principal amount and the interest. As you would have observed in the above chart, larger part of the EMI being paid in the initial years is being adjusted towards the interest. In the first year the principal amount repayment stands only at about 20%
  • Only in the 12th year of the repayment there comes a parity between the principal amount and interest
  • What it necessarily means is that only 40% of the loan repayment term, and that too in the later part of the tenor, a higher portion of the EMI repayment gets accrued towards the principal repayment

Please take a note of the above points since these will help in better understanding of the other factors that you need to consider while considering a home loan switch. 

Rate of interest

The above explanation also clarifies that the rate of interest is a crucial factor in a home loan. That is the reason why the as we see in the housing finance companies advertising the rates so aggressively. Let us review the following chart.


Following are the key highlights of the above graph:

  • On a 50 lakh loan, the total amount paid back to the bank stands at over 1 crore
  • The interest paid is higher than the actual loan amount. While the figure may seem to be insignificant, the fact is that the interest paid is higher than the principal amount 

Now that you have a clarity on the loan construct, let us now look at various factors that must be considered while evaluating the switch.

Pending Loan Term

The pending loan term will play a very important role in your decision to opt for a home loan switch. Now that you know the home loans are structured in a way that the initial instalments are skewed towards loan interest adjustments, the new loan will not be any different. 

While it may make a sense to switch in the early part of the term, it may not be beneficial at all if the loan has aged beyond a certain point. While a few loan pandits peg this age to be at 10 years, calculating yourself may only be prudent. 

Let us look at the following table to understand this factor better.

Following are the key highlights of the above table:

  • If the loan is balance transferred after 5 years, a lower rate of interest of even 100 basis points will lead to a saving of about 4.5 lakh 
  • Similarly if there is a reduction by 2% in the new loan, the saving shall increase to about 9 lakh
  • It has been assumed that the new loan shall be booked for the balance term of loan only
  • In case the loan term is reduced then the saving shall increase further. The increased earning over last five years may get utilized for reducing the loan term. Even a year’s reduction will grossly impact the saving

The takeaways from above table are as follows:

  • Factor the balance loan term. Having served a higher loan term will have a direct impact on the amount of saving that you would make over the new loan. 
  • The above calculations are against the existing loan’s age of 5 years. As the age increases, the positive impact on the savings will decrease
  • In case your current loan’s term is say 15 years, then the equation will be completely different. Therefore, evaluating the impact is highly important
  • Try recalculating the EMI that you can afford to pay now without putting much pressure on your monthly fund requirements

Rate Of Interest On Offer

While a one percent reduction has the potential to result in huge savings, but the same may not be true in all situations. 

Another learning from above table is that as the exiting loan’s age increases, the percentage of interest being discounted has also be larger. Do not become a pray to your assumptions and take out time to calculate the impact on yourself before making a decision. 

Other Factors

Other than the above important factors that will have a direct impact on your monthly obligation against the loan EMI, there are certain other elements as well that you must take into account before arriving a decision. 

Penalties 

While as per the Reserve Bank of India, the banks are not supposed to charge a penalty in case of a home loan closure, but there might be a situation with your existing lending institution may ask for it in case of the loan being taken over by another lender. So do check out with the existing lending institution before hand. Even a small penalty, which generally gets calculated in percentage of the balance principal outstanding, can lead to a large amount.  

Processing Fee

The lending institutions levy a processing fee on all loans. This helps them meet up the administrative costs to some extent. While evaluating the cost benefit, you need to have a clarity on the processing fee from the new lender as well. Again, since this fee is also calculated in percentage (usually 1 percent) of the loan amount, a reduction or waiver can facilitate a better saving scenario. 

Transfer/Stamp Duty Charges

Other than the above two, the new loan may attract a transfer fee and or Stamp Duty. This can further impact the net saving on the new loan. 

Interest Rate Regime

With effect 2016, the RBI has mandated the loans to be linked to the MCLF (bank’s marginal cost of funds based lending rate) as against the earlier bank’s base rate. The banks add a spread to the MCLR 

Borrowers having MCLR linked loans 

The banks generally add a spread to the MCLR to arrive at the exact rate to be charged to the loan. And since the spread could vary from one bank to another, the effective loan rate would also vary. Do check this out as well when planning to get the loan switched. 

Borrowers having loan on base rate

In case your loan is on the base rate, you may just want to have the loan changed to MCLR with the existing finance company. This will attract a small fee though. Or you could have the loan switched to new lender on MCLR. 

Again, one important thing to be kept in mind is that continuing with the base rate may make more sense in case the loan is nearing end of the term. So do your calculations before taking a call. 

Process to switch

You also need to know the process that would entail your decision of having the home loan switched to a different lender. Have a look at the following flow.

The whole process can take up to 2 months to get completed. Please do factor this that there may be a small overlap of the interest that you would need to pay to both the housing finance companies.

Conclusion

The home loan interest rates are lowest in about 15 years and a lot of existing borrowers are lining up for switching their existing home loan. However, due diligence is important irrespective of the exciting offer being extended by the competitive housing finance company. Do take the above factors into account before arriving at any decision.