Switch home loan if you can reduce cost by at least 50 bps: Experts

Don't go by the lowest advertised home loan rates; find out what you are eligible for

Interest rates on home loans are at historic lows with eight lenders pegging their best rates at 6.65-6.8 per cent. If you are paying an interest rate that is significantly higher, consider a rate reset with your existing lender or a balance transfer to a new one.  

When should you shift?

A balance transfer involves costs, so there must be a considerable difference between your current and new rate.

“A balance transfer usually makes sense if there is a difference of at least 50 basis points between your current loan rate and the new one,” says Adhil Shetty, chief executive officer (CEO), BankBazaar. He adds that balance transfer is especially advisable for borrowers who are still on loans linked to older benchmarks, like the benchmark prime lending rate (BPLR) or the base rate.

First, contact your existing lender to negotiate the best rate it is willing to offer.

“Also visit online financial markets to find out the rates you can get from other lenders based on your credit profile,” says Ratan Chaudhary, head of home loans, PaisaBazaar.

Chaudhary adds that you need to factor in both savings and costs when choosing between the two options.

What’s the best rate you can get?

Not every borrower is eligible for the best rates being advertised currently.

“These rates are offered to borrowers with a high credit score, of, say, 800 or more. Female borrowers, salaried employees — especially those employed with the government — get better rates than those employed in the informal sector,” says Gaurav Gupta, founder and CEO, MyLoanCare.in. He adds that often the best rate is offered only if the customer also buys an insurance cover from the lender.  

The rate offered also depends on the quality of the collateral.

“You are likely to get a better rate if you are purchasing a house from a branded, well-capitalised builder, or a ready-to-move-in property,” says Aditya Mishra, founder and CEO, SwitchMe, a digital home loan broker.    

Many customers are currently applying to lenders advertising the lowest rates without checking if they are eligible. Later, they are disappointed to discover that their application has been rejected, or it has been approved at a higher rate.

Weigh the costs

Consider a loan rate reset with your existing lender if it offers you an attractive rate, as this option involves less effort and cost. “Bigger players even do a reset based on an online request. In this option, you have to pay a one-time fee that could range between Rs 1,000 and Rs 10,000,” says Gupta.

If the long-term saving (minus the costs) is higher from a balance transfer, go for that option.

“Here, you have to pay a processing fee to the new lender of around Rs 5000-10,000. In many states, you have to pay a stamp duty, which could be 0.2-0.5 per cent of the loan amount. And you also have to incur a legal-technical fee that ranges between Rs 2,000 and Rs 5,000,” says Gupta.

Prefer a repo rate-based loan

Besides interest rate, also consider the benchmark used by the new lender. Prefer a repo rate-based loan as opposed to one based on the prime lending rate (PLR). The former is an external benchmark, so the benefit of a change in interest rate gets transferred automatically. Shetty also suggests going with a lender known to offer good customer service.

Finally, assess your loan periodically.

“Anytime the rate on your current loan goes out of sync with the best rates in the market, consider a switch,” says Mishra.