Rate hikes are here. Should you switch your home loan now?
Premium- Rates are expected to be hiked further and it’s a matter of time before all lenders increase their interest rates on repo rate linked loans
Has your home loan interest rate become expensive by 10-30 basis points, or bps (one bps is one-hundredth of a percentage point) in the last few weeks? This is a result of the recent 40 bps repo rate hike by the Reserve Bank of India (RBI). The revised repo rate stands at 4.40% currently. Are you considering switching to a lender offering cheaper rates? Experts caution against this move.
“Rates are expected to be hiked further and it’s a matter of time before all lenders increase their interest rates on repo rate linked loans. Borrowers should wait and watch for a few months before taking a decision. More importantly, switching would make sense only if you’re getting a rate lower by atleast 40-50 bps,“ said Amit Suri, a Delhi-based financial planner.
Raj Khosla, founder and MD, MyMoneyMantra.com, said, “Borrowers tend to shop around and possibly switch lenders after a rate hike as they can take advantage of a potentially lower rate of interest. Depending on the rate differential, savings can be significant for a borrower. Fro instance, for a 20-year home loan of ₹75 lakh, a rate differential of 0.5% can result in a saving of ₹5.5 lakh."
The remaining loan tenure is also another major factor to decide whether switching makes any sense.
If you only have 1-2 years left to pay back the loan, carry a cost analysis of what you will save vis-a-vis the charges you will pay in switching.
Moving to another lender attracts a processing fee of 0-1% of the loan amount or a flat fee of ₹3,000-11,000. Some lenders may even charge a conversion fee of 0.25-0.75% of the outstanding principal or a flat fee, which is typically capped at ₹50,000.
Other key miscellaneous charges include stamp duty and fees paid to technical valuers or advocates.
Customers also need to check whether the new lender can levy pre-payment charges or not, in case you wish to close your loan early.
Borrowers with high creditworthiness stand a chance to bargain a lower price with their current lender before they go looking at other lenders, as per Khosla.
“It is advisable for a customer to approach their existing lender for a re-pricing of the existing loan. Lenders tend to match competition pricing, especially for good quality borrowers."
Khosla, however, said that a slightly lower rate should not be the primary reason to opt for a switch, particularly if the lender is a good service provider. “Since a home loan is typically a long-term association, borrowers should additionally assess the quality of service before finally deciding to switch lenders."