Riyad Palia, a pilot, had taken a home loan of approximately Rs 90 lakh, from Axis Bank. The rate of interest was 9-9.75 per cent at the beginning and increased to almost 12 per cent. That is when Palia, who had taken the loan jointly with father Farhad Palia, a businessman, decided to switch his lender. With the help of Switchme.in, an online service provider that specialises in switching services, Palia shifted his loan to State Bank of India. He opted for SBI Max Gain, where you can link a current or savings account to the loan and set off surplus funds against the loan. This way he was able to reduce the tenure from 35 years (it was originally 20 years) to 25 years and the EMI from Rs 98,000 to Rs 82,000. The entire process took three months.
"I was not aware of Max Gain until Switchme told me about it. I was spared of all the hassles and answering the banks' queries. Besides, my son was out of town due to his job," says Farhad Palia.
It has been two years since the pre-payment penalty on housing loans has been abolished. The first to implement it was National Housing Bank (NHB), followed by the Reserve Bank of India. Now a home loan borrower who wishes to shift to another lender can do so without paying any penalty for closing the existing loan before its tenure ends, provided it is a floating-rate loan.
While this encourages home owners to shift their loans from one lender to another in search of better rates and service, some of them may not have the time to follow up with their bank and complete the documentation on their own. They can avail the service of specialists who will do the work for a fee.
Among the handful of such specialists are Switchme.in, MyLoanCare.in, and Destimoney Advisory Services.
Switchme, as its name suggests, offers only switching services (home loan, mobile service provider, electricity providers, etc). Destimoney and Myloancare provide advisory and other services for home and personal loans.
Aditya Mishra, founder of Switchme.in, says, "Switching home loans is a recent phenomenon because of the RBI regulation abolishing pre-payment penalty. We foresee consumers switching their home loans once every three to four years. Once processing fees etc go down, we see the consumer switching more frequently - maybe even once a year."
Shifting is happening on a large-scale and will continue unless financiers think of innovative ways to retain customers, says Brijesh Parnami, CEO (distribution) at Destimoney.
Gaurav Gupta, founder & CEO of MyLoanCare.in, says two-thirds of the enquiries they get are for shifting home loans, while one-third is for new home loans. "Shifting loans from HFCs to banks will continue because the former are under the prime lending rate regime, and hence more expensive. But shifting from one bank to another is not very widespread," he says.
Lower interest rate is the biggest reason why home owners want to shift to another lender. Service standard is the other reason.
"We have seen cases where a customer was considering shifting his home loan from one bank due to poor customer service but later on, he changed his mind because of the other relationships he had with the bank," says Mishra of Switchme.in.
Should you shift?
Before shifting the home loan, home owners should broadly look at the interest rate benefit, remaining tenure of their loan, service standard of the lender, etc.
One should shift if one would save a lot of money by changing the lender. However, this can also be done by reducing the tenure of your loan while still sticking with your existing lender. In this case, however, the equated monthly instalments (EMI) amount would rise.
"We advice reducing the tenure because that will give you more benefit, but provided you can afford to pay the higher EMI. For example, on a Rs 50 lakh home loan with 18 years remaining and 11 per cent interest rate, the consumer stands to save more than Rs 14 lakh by reducing his tenure, whereas reducing his EMI saves him more than Rs 5 lakh," says Mishra.
Another factor to keep in mind while shifting the loan is how much top-up loan the new lender will be willing to give, says Parnami.
How service providers can help
Switching the loan can sometimes take up to a month, simply because the lender does not give the consent letter or property documents on time. Your lender might give your property documents in a single day when you want it for verification by your housing society. However, if you want it for switching your home loan, the same bank might take over a month to locate your documents.
Sometimes, employees at the local branch might ask for charges that don't exist. The customer might not be aware of this and decide not to shift to avoid paying those non-existent charges.
The service providers offer end-to-end service. This includes handling the entire process for the customer till the disbursement of the new loan. They help home owners with filling the application forms, documentation, scheduling meetings, coordinating fulfilment of queries raised by the lenders and getting the new loan sanctioned and disbursed.
The home owner saves time since the service provider does all the running around and knows exactly which official in which branch to approach.
"In case the lender makes excuses for not shifting the loan, we insist that they give the reason in writing, because we know the regulations. In such cases, the bank will agree to foreclose the loan," says Mishra.
Mishra cites the case of a home owner who had taken a loan from a non-banking financial company (NBFC). Although he was a salaried employee and his tax was getting deducted at source, he had not filed tax returns for some years. He was under the impression that filing tax returns meant paying more taxes. So, while the NBFC had sanctioned the loan without the copies of the tax returns, the bank he wanted to shift to refused to sanction his loan without those documents. So, Switchme arranged for a chartered accountant and filed his tax returns for earlier years and then switched his loan
In another case, a home owner had lost his job and wanted to shift his loan to reduce his expenses. However, the bank he wanted to switch to refused to sanction a loan. So, on Switchme's advice, the borrower's father gave an undertaking that he would repay the loan in case of any default.
Another common problem is when the case gets stuck on the loan to value (LTV) calculation, says Gupta. Although the percentage of LTV is same across banks, there could be a difference in the way banks calculate it. For instance, some banks include the cost for club house as part of the value of the house and extend up to 75 per cent of that amount. However, other banks might not do so.
"The problem arises when the lender you want to shift from has lenient rules for LTV, while the lender you want to shift to has stricter rules. In this case, your loan could get downsized. You have to negotiate with the lender in such cases," says Gupta. This is a bigger problem in case of loans for under-construction property.
Customers also need help to identify the right financier to approach for the new loan, says Parnami.
"For instance, we got a loan for a septuagenarian approved from a financier for a high-value loan amount of more than Rs 4 crore. The maximum age limit with financiers is usually 65 years," he says.
Switchme charges Rs 5,000 for switching loans up to Rs 50 lakh outstanding and Rs 7,500 for loans more than Rs 50 lakh. Destimoney and MyLoanCare don't charge any fees because they get paid by banks for sourcing loans.