Switching your home loan? A to-do list

What happens when you are under the spell of increased interest rates leading to increased EMI? It is not surprising, as a borrower, to contemplate either prepayment or switching lenders to counter the burden.

As prepayment entails penalty besides lumpsum payment, switching to lender offering better rates looks like a feasible option. Also known as Balance Transfer (BT), the process here is very similar to that of home loans.

Major variables in BT

Two aspects associated with BT are prepayment penalty and processing fee. Lending is the business of the bank and the interest on the loan, one of its major sources of income. This is one of the major reasons why a bank would charge a consumer, should s/he desire to switch lenders. This charge is known as 'prepayment penalty', the definition varying from bank to bank.

Normally, a bank will charge up to 2 per cent of the total loan outstanding as a prepayment penalty.

Just as there is a cost to pay for a transfer, the new lender will also charge a processing fee to take over the loan. It can be about 0.5 per cent to 1 per cent of the total loan amount one applies for.

It is necessary to check the probable terms and conditions relating to the loan transfer charges to be borne by the applicant.

By now, we have established that banking, like any other industry is a business and that lending is a revenue generating activity, not based on philanthropy or good-will. This brings up a question, why do we switch lenders?

Will it make a difference? Yes, it will.

The basic premise of taking such a step is to be benefited by way of lower interest rates on loans. Banks are known to offer lower interest rates to new loan consumers, rather than the existing ones.

Let's take an example. Say 'A' took a loan at an interest rate of 8.5 per cent in 20002-2003 from lender 'X'. The interest rates have increased on the loan since then and currently he is paying an interest rate of 13 per cent.

Another consumer, say 'B' approaches 'X' for a loan and gets an interest rate of 11.5 per cent.

The option available for 'A' to transfer his loan to another bank 'Y' will make sense only if the interest rate offered is lower than what 'A' is paying currently.

So, in a nutshell, it makes sense to transfer the loan to another bank only if the gain (in terms of interest range) is to the tune of one per cent (or more).

Shop for a better deal

Before one decided to switch lenders, shop for a deal. Approach various lenders with the intent of transferring the loan. The success of the deal or the lack of it will depend on the income of the applicant and the repayment track record. It is necessary to get a rough idea of the offers available from the potential lender/s.

As a first step, inform the current or the existing lender or the bank about your intent to transfer the loan. This can be done by submitting a letter to them. The intent is to be communicated in written form to them.

Now follows the first round of negotiations with the current lender. Before one finally decides to end the borrower-lender relationship with the current lender, it is necessary to negotiate. The borrower can utilise the opportunity to make the lender aware of his reasons for discontent -- latent or otherwise (within scope of reason!).

Once the negotiations are completed, based on the outcome, the lender will give the consent letter. This simply means that the existing lender has given a 'go' to the transfer process.

This letter will mention the details regarding loan like total loan amount taken, the loan amount outstanding as well as the prepayment charges, if any. The amount mentioned will be calculated as on a future date, to enable time for the buyer to arrange the payment.

Once the borrower gets the consent letter, one can approach the potential lender with the same for balance transfer.

From hereon, the process largely resembles to that of taking a home loan.

The applicant has to fill in an application form with the requisite details, followed by a personal discussion. It is necessary to have all the original documents pertaining to the information provided on the application form for the personal discussion.

Discussion is followed by field investigation and valuation of the property. After credit appraisal, the current lender will disburse the loan.

But remember, the current lender will require all the originals documents relating to the property and other documents such as NOCs from the relevant regulatory bodies before the loan is disbursed. Normally, the existing lender will not release the property documents before the loan is prepaid.

Similarly, the new lender may not be ready to disburse the loan before it gets the original papers. Do not distress!

One can obtain a letter from the current lender giving details of the legal papers held by them as security against the home loan and indicating the number of days it will take to release the documents to the borrower/applicant, once the payment is received.

If one has photocopies of the documents held by the existing lender, it will be of help when applying for a loan transfer.

Do not forget, in no other loan process than this does the repayment track record play such an important role. So, make sure that you continue with timely repayment or pay a heavy price.