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When To Switch Home Loan?

IndianMoney.com Research Team | Posted On Wednesday, December 11,2019, 02:46 PM

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When To Switch Home Loan?

 

 

Banks are cutting MCLR Home Loan rates making this the right time to buy a dream house. SBI has reduced one-year MCLR by 10 bps. The one-year MCLR has come down from 8% to 7.9%. New rates are effective from December 10th 2019. This is the 8th consecutive MCLR cut in the financial year. Bank of Baroda has reduced MCLR by 20 bps. The bank has reduced one-year MCLR rates by 5 bps to 8.25%.

What is MCLR?

The marginal cost of funds based lending rate or MCLR is the minimum interest rate of the bank, below which it cannot lend. It’s crucial to check the reset date of MCLR Home Loan. If the loan agreement states that the rate will be reset once in 6 months based on 6-month MCLR, and the reset is scheduled in March 2020, then the MCLR change in December 2019 has no impact.

Now let’s understand what’s switching of home loan. Home Loan balance transfer or switching is the transfer of the entire unpaid principal amount to another bank to enjoy lower interest. The bank which had sanctioned the home loan gets the unpaid amount and you must pay the home loan EMIs to the new bank at the specified new rates. An important question is when to switch home loans?

Want to know more about Home Loan? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial product.

See Also: How to Select the Best Home Loan?

When to Switch Home Loan?

Experts in the banking industry say it makes sense to switch home loans if the existing tenure is over 10 years. In the initial years of the loan, most of the EMI installments comprise of interest.

Follow this rule of thumb when it comes to switching home loans. Opt for home loan balance transfer if remaining tenure is over 15 years and the new loan is cheaper by 25 bps than what the current lender offers.

If the remaining home loan tenure is between 10-15 years, look at home loan balance transfer only if the interest rate difference is more than 50 bps. If you have less than 10 years left on a home loan, look at savings before opting for a home loan balance transfer.

See Also: Why is Your Home Loan EMI Still High?

When to Go for a Home Loan Balance Transfer?

Hitesh has a home loan of Rs 1 Crore availed at 11.25% home loan interest. The home loan tenure is 20 years. Hitesh has made home loan EMI payments for 9 years. He has an opportunity to switch the home loan to a new bank at 10.5% home loan interest. Should he opt for a home loan balance transfer?

  • The home loan interest rate differential is 75 bps. The home loan tenure left is more than 10 years. This means it’s wise to transfer home loans.
  • Home Loan switching is lucrative as only 9 years of home loan tenure is covered. A large portion of the principal is outstanding as EMI is mostly an interest component. The interest component comes down gradually as the principal component goes up.
  • Look at prepayment charges and processing fees for the new loan.
  • There are hassles of paperwork when it comes to home loan balance transfer.

Yes, Hitesh must opt for a home loan balance transfer as potential savings are significant.

See Also: How to Select The Best Home Loan in India? What Should I Consider?

Home Loan Balance Transfer Tips:

  • Transfer home loan early in tenure. The difference must be at least 0.5% of the existing rates as over a long duration, you can save a lot of money.
  • Look at processing fees and other charges before transferring home loans.
  • You might need a top-up loan and some banks offer top-up at home loan rates. Switch to a lender who offers lower home loan rates as well as a top-up facility.

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