You can take advantage of the difference in interest rates for existing and new customers by asking your banker to switch over your loan to the rate applicable for fresh customers. This, however, comes at a cost.
Typically, the borrower would have to pay some percentage of the balance outstanding, say 1.75 per cent, and 12.24 per cent service tax on it, to avail the new rate of interest, which, again, could rise over time. In this case, the tenure remains constant, while the interest burden is slightly reduced.
In the example that we had taken earlier, the cost incurred to switch over would be about Rs 53,000, including service tax. The outstanding loan and the term of 319 months don’t change, but the interest reduces to 11.50 per cent. The EMI falls to Rs 27,171 and there is an overall savings in interest of about Rs 800,000 (see The options for reducing your interest burden: Switching).
B. Refinancing. Not all banks charge the same rate of interest on home loans. So, if you can find a bank offering a lower rate of interest, you can refinance the loan—borrow from the new lender and pay off your old one. Banks expect to make a certain amount of money by funding you for some years.
That amount is their expected future earning from you. Now if you foreclose the loan, that stream gets truncated. To ensure against that, banks impose a foreclosure penalty, through which they recoup part of this foregone income.
The full repayment penalty is normally 1.75 per cent of the outstanding amount plus the service tax. The processing fee, depending on the bank, is 1.0-1.5 per cent.
Refinancing is usually costlier than switching, but the overall savings are more (see Refinancing).
Here, the cost of closing the loan from the existing lender and opting for a new one from another lender will cost Rs 87,000. Paying this reduces the loan tenure to 240 months and the interest burden to about Rs 42 lakh (Rs 4.2 million) assuming that your balance working life is more than 240 months. The new lender will want to finish the loan within your balance working life.
Image: Refinancing is usually costlier than switching, but it's worth considering | Photograph: Ami Vitale/Getty Images
Also read: Economic slowdown? Corporate salaries unaffected
Advertisement
