Hours after the Reserve Bank of India (RBI) on Tuesday in its fourth bi-monthly monetary policy announced a 50 basis points (bps) reduction in its key policy rates, the country’s largest lender State Bank of India (SBI) slashed its lending rate by 0.40 percent. The new rate will stand at 9.30 percent with effect from 5 October.
Following suit, even smaller bank like Andra Bank reduced its lending rates by 25 bps, and the new rate stands at 9.75 percent. In fact, it’s only a matter of time that other banks will also do the same.
This means it’s about time you keep a watch on interest rate movements especially if you are a existing home loan borrower and stuck on a higher rate. This might just be a good time to switch your home loan from an existing lender to a new lender who offers a cheaper rate.
What is switching
If you are an existing home loan borrower say stuck on a home loan say at 10.50 percent and another bank offer a home loan of 9.50 percent, when you switch the loan from your existing bank to the new bank, you simply get the benefit of the new lower rate with the new bank. In fact, the lower the interest rate of the new lender, higher will be your savings. In fact, even your EMI amount which you need to pay towards the new lender decreases substantially. Take for instance, if your loan outstanding amount is Rs 50 lakh and you have 15 years left to service the loan, and you currently pay 11.75 percent p.a. and the new lender offers 10.25 percent p.a. as rate of interest, the total interest cost of remaining loan would be cheaper by Rs 7,08,660. That’s a lot of money.
Here are three things to keep in mind while switching the loan.
1. First approach your own lender and try to negotiate a lower rate. After all now that more and more banks will start reducing interest rates, you are in a better position to bargain for better terms with your current lender. Banks don’t want to lose good borrowers who repay loans on time. So, if you know you have a good credit history, make the most of it
2. Switching to a new lender who offers a lower rates can save you load of money, but you will have to make sure that the timing is right for you. As a thumb rule, if you switch at the beginning of the loan tenor, you pay a higher amount towards the interest component, while towards the end of the loan, you pay higher amount toward the principal part. You get a better deal when you switch the initial years of the loan. So if you are in the initial years of servicing your home loan, give switching of loan, a serious thought. In fact, even if you are stuck at a really high rate and only a few more years for the loan term to finish, switching might be worth it. In such a case too, you will be able to save a substantial amount if you switch to a lower rate loan.
3. Get rid of laziness. Probably the biggest hurdle in switching the loan, does not come from the lenders side. Neither new nor old. Most people fail to switch an existing high interest rate home loan to a lower rate home loan, simply because of inertia aka laziness. Remember, even a 1 percent lower rate can save you good amount of money.
Do your numbers on any online home loan refinance calculator and see how much you can save of you renegotiate with your existing lender for lower rate or switch to a new lender offering lower rate. Once you work out those numbers for your specific case, take that plunge. Good luck!