Transferring a home loan is not simple, but if you get a good deal that helps you save, it's a great idea to go ahead efinancing or switching' your existing home loan o another lender is also known as a `balance transfer'. In a balance transfer, your outstanding loan is transferred to another lender of your choice by conforming to their rules and regulations.
There are many reasons for switching lenders, of which the following are the most common ones: For lower interest rates: If the interest rate in the market has become lower from when you took the loan, it may not make economic sense for you to continue paying a higher EMI. You have the option to apply for a refinance with a new lender or even with your existing bank if they are open to shifting your loan to the new lower interest rate.
To change the terms of the loan: Some clauses of your loan may become unacceptable for you at some stage. For instance, you wish to extend the tenure of your loan and your current lender says no. In this situation, you might consider moving to another lender if they are more flexible.
Additional money requirement: From the time you originally took a home loan, the property of the value might have appreciated. If in case the existing lender is not open to offering you top-up loans for your additional money requirements, refinancing will be a good choice, if the new lender is willing to give you a top-up loan against the rise in the property value.
Rarely, service issues and accessibility conveniences may also prompt people to switch their lender.
The way balance transfers work is that the new lender pays the outstanding amount of your loan account to the old lender as per the date of request for closing the account. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post-dated cheques/ ECS will be cancelled and your liability is shifted to the new lender.
You will be charged a preclosure charge by the existing lender which could be anywhere between 2-5% of the principal outstanding of the loan at the time of refinance. Pre-closure charge compensates the lender for the loss of interest payments that they would have earned, if the loan remained with them. But if you are paying the outstanding amount from your pocket and refinancing it soon after, there are chances that the pre-closure charges will be waived. You are also required to pay a loan processing fee with the new lender as in any other cases which will come 0.5-1% of the loan applied. Many banks restrict the processing fee to a maximum of R5000.
So, remember that refinancing a loan should still make sense for you after you pay the pre-closure charges to your existing lender and the processing fee to the new lender. For example, if you have R20 lakh outstanding in your existing loan and 15 years remaining on the loan tenure, then while prepaying the loan you need to pay 3% pre-closure charge, which comes up to R60,000. And, to the new lender you pay a processing fee of R5000. So, the total expenses come up to R65000.
If one assumes that your current interest rate is 11%, the table may help you compare how much you are saving if you switch to a new loan with an interest rate of 10%. So, if you are switching from 11% to 10% you can save close to R2lakh on the whole after deducting the penalty charges and processing fees.
It's important to note that refinancing is economically viable only if the saving seems like a significant amount to you post these expenses. It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due during the latter part of the tenure which will not make sense for the switch.
While applying for refinance, ensure that your paperwork, especially the property ownership papers, reach the new lender on time.
Some banks hand over the property documents on receiving the cheque from the new lender. For some others it takes some time to deliver the documents. Be clear with these terms of both banks. If the papers are not in order, the disbursement can be delayed. During this transition time if the borrower unknowingly stops paying EMIs to the existing lender it creates an unintentional bad credit record.
Similarly, one must go through the loan agreement with the present bank and be aware of all the clauses and requirements to avoid any discrepancies later.
For approval of a refinance, you will have to go through all procedures credit appraisal, legal verification of property documents and technical evaluation with the new bank in the same manner as any new applicant.
The bank will approve the applied loan amount only if you are eligible for it. Also, refinance will not be possible if you have irregular repayments with the existing bank.
