When we talk about switching existing home loan from one bank to another, ‘What is the very first thing which comes to your mind?’. In most cases, that one thing which makes you switch home loan is saving money. And to save money, home loan customers always tries to keep there eye on the upcoming attractive offers by different banks. When you find a deal which offers lower interest rate as compare to your existing home loan, is the right time for you to switch home loan and grab the opportunity to save money.
But taking this decision and implementing the same is not as easy as it sounds as it cost you heavily if you are not aware about the procedure and crucial details. As banking industry is maturing each day and now each bank has their own set of rules and policies which they enforce on their customers when one applies to switch his home loan to another bank. Like some banks put penalty on the their customers, while new bank charges processing fee on the outstanding home loan.
Reasons :- Why To Switch Home Loan From One Bank To Another
What are the possible reasons due to which one can consider the option to switch home loan from one bank to another. Lets have a look:-
Interest Rates :- If you get lower interest rate as compare to your existing home loan interest rate then one can consider the option to switch the home loan from one bank to another.
According to experts, It’s always advisable to shift the loan if you can bring down the interest on your loan by 175 to 200 basis points (that is 1.75 to 2%).
For example, Mr. X took a home loan at an interest rate of 9% in the year 2004-2005 from ABC bank. Bank raised interest rates over a period of time on the loan & now he is paying an interest rate of 13%. Whereas Mr. Z approaches ABC Bank for a home loan and gets an interest rate of 11%.
In this scenario, Mr. X can approach some other bank if the interest rate offered is lower than the one he is paying currently. This will definitely help him to reduce his EMI’s.
Bank Charges On Switching Home Loan
- Penalty On Switching Home Loans :- The penalty charged by banks from their customers on switching home loans is also known as Switch over charges and balances transfer charges. When one plans to switch home loan from one bank to another, you may have to pay switch over charge on your outstanding loan with existing bank. Almost banks charges between 0% to 2% as balance transfer charge as penalty. For example, You have a home loan of Rs 5 Lakhs out of which you have paid 2 lakhs. So if you plan to switch home loan to some other bank then you will have to pay penalty on the outstanding amount i.e Rs 5 lakhs – Rs 2 lakhs = Rs 3 lakhs. In this case, if your bank charges penalty @2% then you will be charged 2% of Rs 3lakhs i.e Rs 6000 as switch over penalty before switching to another bank.
- Processing Fees for Home Loans :- Bank charges a sum of money from their loan customers called as processing fees for preparing all of the information for the loan application, verifying information, etc. Depending on bank, this fees ranges from 0.5% to 1.0% of the amount of loan. For example, You have applied for a home loan of Rs 3 lakhs and your bank charges 0.5% processing fees for all home loans. Then your bank will calculate processing fees on the loan amount of Rs 3 Lakhs and add that amount to your loan amount. In this case, bank will calculate processing fee on Rs 3 lakhs i.e 0.5% of 3 lakhs = Rs 1500 and add this amount to Rs 3 Lakhs and your final loan amount will be Rs 301,500.
**Tax Deduction for Processing Fees :- One can also avail tax deduction on processing fee paid for home loan. You need to ask your bank to provide you receipt for the fees payable in respect of a home loan to make yourself eligible to claim the deduction.
- Mortgage Registration Charges and Pre-Payment Charges (If any)
ALSO READ : How Much Home Loan Am I Eligible For?
How To Transfer Home Loan Form One Bank To Another?
Once you find a better deal than the one you have and after analyzing the charges involved to switch home loan, you can follow the steps to transfer your home loan:-
- Inform Your Existing Lender :- As a first step, you need to write a letter to your existing bank informing your intent to switch home loan to another bank.
- Get NOC From Your Existing Lender :- After receiving your letter your bank will to negotiate with you and tries to convince you to continue with them. After negotiation, based on the result, lender issue a letter of consent to the borrower. Which is a no objection certificate (NOC) from the lender, which simply means lender have no objection on the transfer process.
This letter will include the details regarding loan like total loan amount taken, the loan amount outstanding as well as the prepayment charges, if any etc.
- Approach New Lender :- After getting NOC from existing lender, borrower can approach a potential lender for balance transfer.
- Transfer Of Property Papers From Old Lender To New:- Your new bank will demand property-related documents for processing your loan application. For that you need to make sure your old lender should either transfer your property papers to your new lender or atleast write a letter informing the timeline by which they will transfer documents.
You can submit the photocopies of all loan and property-related documents to your new lender in case of delay in transferring original documents.
Things To Remember Before Deciding Weather To Switch Home Loan Or Not?
- Rate of interest should be atleast 1.75 to 2% lesser than your existing loan.
- The tenure remaining in the original loan should be longer to get the complete benefit of switching loan.The longer the tenure left, the higher is your total savings likely to be.