When is it a Good Decision to Shift the Home Loan
for saving interest?

Buying a Dream Home is one of the most important and emotional decision in everyone’s life. And to achieve that Home Loan plays a very important role. However, many clients suffer from a high interest rates. They keep complaining that when the RBI increases the interest rate, my bank increases the interest on my home loan, but when RBI reduces the interest rates my bank never reduces in the same proportion.

All such clients are generally look out for shifting their Home Loans and get it transferred at lower rate of interest. No doubt, there is a significant savings if such decision is taken wisely. But most client’s don’t calculate before taking the decision and hence, they eventually get stuck to another problem.

For Shifting the Loan, here are the Golden Rules:

• Never think of shifting the loan to another bank at every small interest difference. For Example, your Home Loan Rate is 8.75% and someone offered you 8.50%, don’t jump to shift. Reason? Well, there are two reasons : One, the upfront cost of such transaction is almost 0.50% to 0.60% in some locations. For example, on a 50 Lakhs Home Loan, the Home Loan Mortgage Stamp Duty itself is 0.30%. Apart from this, there is a NOI (Notice of Intimation) charges of 17,000/-Banks will take Processing Fees and Valuation Expenses of approx..10,000/- So, all put together, the transaction cost is close to 40,000/- Against, this, the borrower will end up saving 671/- per month of EMI if 10 Years of tenure is pending. This will translate into the savings of 80,000/- over 10 years. But the upfront investment is 40,000/- So, I would personally not recommend this transaction, because the returns is close to 7.25% (40,000 x 7.25%) x 10 Years in reinvesting the interest.
• One more thing needs to be factored in. No one runs Home Loan for full tenure. The above calculations show that if remaining 10 years of loan is being run, the savings of close to 80,000/- will accrue. But, the cost needs to be invested upfront. So, if you close the loan in 6 years, the cost will still not be recovered.
• Apart from just savings, you also need to look at the convenience of operations. If your existing bank is able to provide timely interest certificate and statement of account, before you move to another bank, look at how convenient it would be in the new bank.
• Look for the insurance costs in the new bank. New Bank who is giving lower rate of interest may want your own and property’s insurance done. While this is actually a wise decision, but if that is compulsory, it means additional cost of transfer. One needs to factor in this cost also, because in the current home loan, these costs have already been paid or existing bank is not asking for it.
• Possibility of Top Up loans: If you are planning for a Top Up on your existing home loans, you need to factor in this interest rate also. The new bank might be much cheaper or much costlier so far as Top Up is concerned. So, the Proportion of Top Up loan needs to be considered while transferring the loan. If the proportion is high, the existing bank or new bank, whoever is giving overall good deal (Home Loan + Top Up) that option needs to be chosen.
• And Finally, negotiate for the better rate with existing bank only. Most likely the existing banks take lot of deviations for existing clients and they give close to the same rate what competition is giving to you.

To Summarize, I would say, do following exercise before you decide on transferring your home loan:

• Calculate the difference of two EMIs (Existing HL EMI less New Bank HL EMI)
• Multiply that with number of months you are planning to run the loan (Forget about total tenure. Instead, consider the months you wish to run the loan)
• Calculate all the expenses to be done upfront: Processing Fees, Stamp Duty, Valuation Charges, Legal Expenses, NOI Charges etc.
• If and only if the ratio of Benefit / Cost is more than 2.50, you should go ahead.