When to switch home loan?

Banks are cutting home loan rates. So it is also the right time to take a loan to buy a house. SBI has reduced MCLR by 10 bps in a year. This reduced the MCLR from 8% to 7.9%. The new rates are effective from 10 December 2019. This was the 8th consecutive MCLR cut by SBI. Bank of Baroda has reduced MCLR by 20 bps. The bank has reduced MCLR rates by 5bps to 8.25%. Other banks are also reducing MCLR. In such a situation, those who are thinking of taking a home loan to buy a house and for the customers already home loan, is the right time to switch their loan. Sometimes switching home loan is beneficial, so through this article we are going to give you information about when it is better to switch home loan.

What is MCLR?

The Marginal cost of funds based lending rate – MCLR is the minimum interest rate of a bank. Bank cannot lend below this rate. It is very important to check the reset date of the MCLR home loan while taking an MCLR based loan from the bank. If the loan agreement states that the rate will be reset once in 6 months based on the 6-month MCLR and then the reset will be set in March 2020, the change in the MCLR in December 2019 will have no effect. Therefore it is very important to know about the reset date of MCLR.

What does it mean to switch home loan?

Home loan balance transfer or switching refers to transferring the remaining amount for repayment to another bank after taking a loan. This is done to pay the remaining principal amount at a lower interest rate. In this process, the bank that approved your home loan gets the unpaid amount and you have to pay the EMI of the home loan at the new rates specified by the new bank. Now the question arises when to switch home loan?

When to switch the home loan to another bank?

Banking industry experts say that if the current tenure of the loan is more than 10 years, then it makes sense to switch home loans and it can also be beneficial for you. Follow this thumb rule when it comes to switching home loans. Choose the option of home loan balance transfer only when the tenure of the loan is more than 15 years and the new bank is offering at least 25bps lower interest rate than the current bank. If the tenure of the remaining loan is between 10-15 years, choose the option of home loan balance transfer only if the interest rate of both banks is at least 50 bps difference.

If the tenure of your home loan is less than 10 years, then you should avoid loan balance transfer and focus on saving. You can understand this through an example. Hitesh has taken a home loan of Rs 1 crore at a rate of 11.25%. The tenure of his home loan is 20 years. Hitesh has been paying home loan EMI for the last 9 years. But currently, it has the option to transfer the balance of the home loan at a lower interest rate. The new bank is offering to pay back home loan dues at a rate of 10.5%. In this situation should he opt for home loan balance transfer?

  • There is a difference of 75bps in the home loan interest rate of both banks. The tenure of home loan is more than 10 years. This means that it would make sense to transfer home loans.
  • In this situation, it makes sense to switch home loan because the loan has only been 9 years. There are still 11 years left and a major portion of the principal is to be repaid. In such a situation, Hitesh can save a lot of money by switching to a bank offering interest at a lower rate.
  • Before switching the loan, it is necessary to know the prepaid fee and processing fee of the new bank.
  • When it comes to home loan balance transfers, there is a lot of paperwork. Sometimes you may have trouble with it. But when you get a good option at a low interest rate, then you should definitely transfer home loan balance, because saving is also very important.

Tips for transferring home loan balance

  • When more tenure is left means transfer should be done as soon as possible after taking a loan. But there should be a difference of at least 0.5% in the interest rates of both banks.
  • Check the processing fees and other charges before transferring home loan.
  • Switch to the same bank which is providing top-up facility along with lower interest rate.