Shopping around for cheaper interest rates on existing home loans has been possible for a while now, but never really feasible. That's set to change now.
With SBI slashing home loan rates this week, and other banks facing a "cut rates or lose market share" scenario, home loan borrowers may finally get an opportunity to really take advantage of the "no prepayment penalty regime", a year after it was put in place.
Three years ago, when SBI launched a rate war with an 8% teaser rate offer, stiff pre-payment penalties deterred many borrowers with other banks from making a switch. But by the time pre-payment penalties were abolished in 2011, rate wars had abated, leaving borrowers with no attractive options for a switch.
Now, more such options are likely to open up as other banks consider a response to protect their market share.
What to consider before moving your existing home loan to another bank offering lower interest?
1) If your loan has less than 10 years to go, you may not gain much
2) Compare cost of converting loan to a lower rate with your existing bank, with the cost of transfer to a new bank
3) When rates are cut, don't reduce the EMI, but lower the tenure. Lower EMIs mean longer tenures and higher interest costs
4) Factor in the processing fee. Most lenders charge 1% to 1.5% of the loan outstanding
5) Between two banks who offer you the same rate, choose the one that offers a lower spread*
6) Banks often deny lower rates to existing customers by playing around with the "spread". For example, SBI has cut rates only for new borrowers
7) Don't be in a hurry. As the festival season approaches, more banks may offer such "special" rates
*The interest rate on home loans has two main components, the base rate (the rate below which the bank cannot lend) plus the spread (which is the margin based on customer and product specific factors).