Consider prepaying or shifting but do the homework, as it makes sense or not, depending on where you’ve reached on the tenure.
If you have mortgaged your home, true to the word’s original Latin meaning, it could well end up being a pledge until death. The latest rise in the Reserve Bank of India’s rates will result in banks raising their lending rates by 25-50 basis points. For the home loan borrower, this translates into ongoing loans extending for years beyond the original tenure or paying higher equated monthly instalments (EMI) .
“Since home loan rates have already moved 250 basis points up, existing borrowers will be hit the hardest,” says Vipul Patel, director, Home Loan Advisors, a mortgage advisory firm.
Renegotiating: A borrower wishing to reduce the interest burden could look at renegotiating with his bank. Some banks and housing finance institutions do offer a reduction in interest rates to retain customers. The fee for restructuring could be anywhere between 0.5-1 per cent of the applicant’s balance principal amount at the time. However, renegotiation would also mean the loan will be treated as a fresh one. Bankers say decisions will be taken on a case-to-case basis, with the reduction and fee charged being their discretion.
Balance transfer: An option for existing customers is to look at balance transfer, by moving to a new bank. Again, the loan is treated as a new one. Bankers do not encourage it, charging a 1.5-2 per cent penalty. They only allow entire prepayments without a penalty if you are able to prove it is from your own funds. They quote RBI reports to say there have been substantial rises in salaries, proof enough that interest rate rises can still be serviced.
If one is currently paying 11.50 per cent for a loan of Rs 80 lakh with a 20-year tenure, a drop of one per cent in the interest rate after the first year would lead to a reduction in EMI by Rs 4,100 and a total savings of Rs 50,000.
A new loan account will mean one-time processing fee and mortgage charges. Processing fees are Rs 5-10,000 for salaried persons and could be 0.5 per cent of the loan amount for self-employed individuals. Mortgage fees would be 0.2 per cent of the loan amount.
“The new interest rate should be lower after considering all the transfer costs. Just a one per cent differential will not be enough,” says R S Sangapure, general manger (retail banking), Central Bank of India.
Existing borrowers should transfer their loans from floating rates and link it to the base rate (new loans are all linked to the base rate since this regime was introduced; existing borrowers have to approach the bank to shift). This will reduce stickiness of the loan, an advantage when rates go down, as they inevitably will over the long-term tenure typical of a home loan. Most banks had a home loan-specific benchmark rate and the extent of change when rates dipped was decided by them; the base-rate formula does not give this extent of discretion. It would enable a rise and fall in line with market conditions.
Strategy: According to Shyamal Saxena, general manager, retail banking, Standard Chartered Bank, “During the first few years of any home loan repayment, the interest component is higher. In case of a switch, customers would pay higher pre-payment charges to their existing banks.” But if the differential between transfer cost and old rates supports the cause, do it.
Customers in the middle of their loan tenure, mostly after five to seven years, could look at switches, provided the savings on the interest paid is substantial, versus the costs being borne by them. Opting for a balance transfer during the last leg of home loans may not be worth the shift. During this time, the EMIs go towards principal payments.
Those who borrowed under special rate schemes (fixed cum-floating loans) prevalent during the past two years would be able to sustain the rate rises for now. The special schemes offered low rates in their initial fixed rate regime for two to three years and they will only feel the impact of higher rates once they move to the floating rate regime. Such borrowers need not move at all.