The low-interest-rates offered by home loan lenders attracts existing borrowers and encourages them to save some interest repayment by switching to low-interest-rate lenders. Any amount of reduction in interest repayment will make home loan borrowers happy amidst stressful time.
Consistent repo rates reduction by Reserve Bank of India (RBI) since last year led to a reduction in home loan lending rates. Most of the banks and financial institutions are offering a new home loan at multi-year low-interest rates. Existing borrowers are trying to take advantage of the falling these interest rates and can save a substantial amount on interest outgo by switching to another lender.
Many existing home loan borrowers are switching their ongoing loans to the new lender so that they can get the benefit of these circumstances. Loan borrowers must be cautious while switching, one must not fell into trap of low-interest rate differential alone. Before taking any such decision borrowers must do their cost-benefit analysis to see whether it is a good choice to make a switch or not.
Other factors must be considered apart from differential interest rate such as pre-payment charges of the old loan, legal fee, processing fee on the new loan, stamp duty charges (on the new lender home loan documents), etc. These are some of the additional charges that borrowers bear while switching; these can make a considerable difference for financially sensitive borrowers.
Undoubtedly even a small reduction in home loan interest rate can save a significant amount and cumulatively result into a few lesser number of EMIs for the borrower. But if the additional charges nullify that benefit from the lower interest rate, then the purpose of switching lender doesn’t make any sense.
Now the question arises when should a borrower switch and when one shouldn’t? This kind of calculation should be done on a case-to-case basis to find whether switching to a new lender is beneficial or not. But according to several experts, the greater the loan tenure, the more will be potential benefit from interest saving. This will benefit when only a few years of loan have passed and a large part of the home loan principal is still need to be paid. In this case, a borrower can switch to a new lender to get the benefit of low-interest rate.
After considering everything, a borrower should shift their existing home loan to the new borrower only if there is a difference of 50 basis points between the old interest rate and new rate and the remaining tenure should be at least 10 plus years.
Despite all conditions and low-interest rates, availability borrowers must do their cost-benefit analysis before making any decision to shift to a new lender.