6 MinsNov 22, 2021
Rakshit Gupta, 37, had availed a 20-year home loan in 2015. He signed up for a loan at a fixed interest rate of 10.1%. Since then, interest rates on home loans have fallen considerably. Rakshit wants to switch over to a lower interest rate but is unsure of what he should do. Let us see what his options are:
1. Switch from a fixed interest rate to a floating interest rate: Fixed interest rates are typically higher than floating interest rates. Assuming Rakshit has an outstanding loan of Rs 50 lakh and 14 years to pay it off, this is how his EMI (equated monthly instalments) shape up:
|Outstanding||Interest Rate||Period||EMI||Total Interest |
|Rs 50 Lakh||10.1%||14 years||Rs 55,711||Rs 43,59,427|
|Rs 50 Lakh||6.9%||14 years||Rs 46495||Rs 28,11,197|
Note: The interest rates mentioned are used an illustration. Actual interest rates may vary
This is potentially a massive saving of Rs. 15.48 lakh. Even if interest rates do rise again during the tenure of Rakshit’s loan, he is still likely to save a significant amount.
2. Transfer loan to a new lender: If Rakshit’s lender is not giving him favourable terms to switch to a lower interest rate loan, he can choose to transfer his loan to a lender who is willing to give him favourable interest rates. All it requires is some research and a bit of effort. It’s pretty easy to switch your lender. It involves the following steps:
- Transferring of home loan from one Bank / financial institution to another is similar to applying for a new home loan. Check details of the loan such as interest rate, processing fees, other T&C etc. and compare the same with your existing lender.
- Submit an application to your current lender about the switch and obtain the required documents from your current lender. This would also be a good time to try and negotiate a lower rate of interest with your existing lender.
- If you decide to proceed with the balance transfer to a new lender, then submit the KYC (know your customer) documents, income statements, IT-returns, list of documents, repayment schedule, loan balance statements, etc, to the new lender. You will also have to fill an application form and pay processing fees.
- The new lender may undertake a legal and/or technical verification before approving your loan. Once the loan gets sanctioned, the lender will proceed with the disbursement. The cheque or DD will be prepared for the balance outstanding amount, in the name of previous bank/financial institution. This will be handed over either to you, i.e. the customer or to the bank/financial institution.
One point you have to keep in mind while considering a new lender is that you shouldn’t do it if you are planning to sell the house soon.
Check and change interest pricing: The system for charging interest rates has evolved over the years, but customers often have no idea what it means or how it benefits them. Loans sanctioned between July 2010 and April 2016 were calculated on something called the 'Base Rate'. The base rate was the minimum interest rate that banks could lend to customers. After April 2016, the rate was changed to the Marginal Cost of Funds Based Lending Rate (MCLR). This lasted until October 2019. After that, it was altered to EBR or External Benchmark Rate. So, there have been two regimen changes since Rakshit availed of his loan. There is a high chance that he is paying a higher interest rate because he hasn't chosen to change his rate regimen. This could range anywhere between 0.5-1%. He can change his regimen by paying a nominal fee (+GST) to his bank.
[Also Read: What Type of Home Loan is the Best one for You?]
These three options are the best ones for transferring a home loan to a lower interest rate. Rakshit could consider what is best for him before finalizing his decision.
Currently, interest rates on home loans are at historic lows. Anyone with an existing home loan should take a closer look at the interest rate they are paying and consider shifting to a lender that offers lower rates.
Axis Bank offers a range of home loan products suited to the needs of all its customers. Find out more about Axis Bank Home Loans. You can check your eligibility with the Axis Bank Home Loan Eligibility Calculator.
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