Several commercial banks have recently announced a reduction in the marginal cost of funds-based lending rate (MCLR), thereby lowering the home loan rates for customers. However, the impact is not immediate. There is often a reset-period for MCLR-based home loans, after which the rates get revised for borrowers.

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Now, this means that customers whose reset periods are not falling in the near-term may not benefit from the lower rates. Additionally, borrowers who have a loan account with banks that may have not announced the reduction will end up paying more.

Given the situation, customers may have second thoughts if they should switch their ongoing loans to save more.

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On this, Naveen Kukreja- CEO and Co-Founder, Paisabazaar, says that customers should base their decision on the basis of external benchmark linked home loan rates offered by other banks and not on the basis of MCLR cuts.

“Whenever existing borrowers transfer their home loans to other banks, the new bank considers it as a new loan. And the interest rates of all new home loans from banks since October 2019 are linked to external benchmarks, not MCLR,” he explains.

Now let’s understand how the home loan transfer works:

For this, consumers first need to shortlist the financial institution they want to transfer their loans to. Then they will have to negotiate everything with the new financial institution in advance, including the revised rate of interest that is on the offer and the processing fee.

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“Once consumers sign the sanction, then the later financial institutions pay the former one,” explains Rachit Chawla, CEO, Finway.

Chawla further explains this with an example.

“Suppose the earlier institution was X and the consumer negotiated everything in regards to that loan from a different institution, Y. Now, Y will talk to X and then take over all the papers themselves; the legal teams will talk to each other and complete the formalities. Consumers will have to sign a sanction letter of financial institution Y,” he elaborates.

Other than that, everything gets taken care of between the financial institutions themselves.

But, how right it is to opt for a home loan switch?

Nevertheless, the switch may be challenging in some instances, warn experts.

As the transferee bank will consider home loan balance transfer as a new loan, it will carry out all the documentation and loan approval related processes associated with a new home loan.

“This means the borrower will incur various fees like processing fee, administrative fee, etc while transferring the home loan,” explains Kukreja.

“As these charges can constitute a substantial sum of money, borrowers should factor in these charges while calculating the net savings on transferring the home loan,” he adds.

The second challenge can be in the form of a delay, which means that the same account gets initiated with the new institution, and at the same time, the EMI and interest is running at the previous institution.

“Another challenge is that sometimes, institutions, in order to retain the consumers might levy a foreclosure charge. The consumer might have leverage here though because RBI has clearly stated to all the institutions, that unless there is a company involved, there should be no foreclosure charges,” adds Chawla.

Manohar Lal, Assistant Professor—Finance, ITM Vocational University suggests borrowers be extra careful while deciding to make the switch.

“In the current scenario, the shift in the rates by the central bank is more than 25 basis points southward. Thus, it makes sense economically to make the switch but once the southward rate trend ceases, the switch may have limited economic benefits thereafter,” he opines.

Disclaimer:

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First Published:Jul 10, 2020 12:35 PM IST