Home loan interest rates are not fixed. They change with a change in the macro interest rates. In some cases, the interest rates increase while in other cases, the rates decrease. In recent times banks have reduced the interest rates on their home loans. These new reduced rates are available to new borrowers who borrow the loan after the rate cut. What about you? Don’t you get the benefit of rate cuts?
Home loan interest rates are of two types – fixed and floating. If you have a fixed interest rate home loan, your home loan interest rates will not reduce even when the bank cuts down its lending rate. On the other hand, if you have a floating rate home loan, the interest rates would reduce when there is a reduction in the bank’s lending rate. However, even in floating rate home loans, the decline comes much later than the rate cut done by the bank. Does it mean you should switch your loan?
Home loans allow switching options wherein you can transfer the balance of an existing home loan from one lender to another. This is called a balance transfer facility and borrowers opt for this facility only when they find another lender offering them a lower rate of interest on their home loan. So, when there is a rate cut, you might think of switching to a low rate home loan from another lender through a balance transfer option. But, is it the right time?
Balance transfer of your home loan proves economical in the following cases –
• When your existing lender is not lowering the interest rate on your floating rate home loan and you find another lender offering a lower interest rate on your loan
• When you have a fixed interest rate home loan and want to switch to floating interest rate home loan to enjoy lower interest rates after the rate cut
• When you have a long repayment tenure left and a reduction in the interest rates would help you save a considerable sum of money over the remaining tenure
• When you have availed a loan on the bank’s prime lending rate which is not very responsive to new rate cuts
Moreover, when you think of switching your home loan, here are a few pointers which you should keep in mind –
• Try and talk to your lender before you switch. No lender wants to lose its borrower and when you inform the lender of your intention to switch, you can renegotiate the interest rate on your home loan and reduce the rate with your existing lender itself.
• Switching, or balance transfer of the home loan, incur a processing fee. Only if the fee paid is lower than the savings in interest rates, you should switch.
• If you have a fixed rate home loan, your lender might allow you to switch to a floating rate home loan with itself. Almost all home loan lenders allow changing the home loan interest from fixed to floating and vice-versa. So, you can switch only the type of interest rate in your existing home loan itself.
So, before you decide to switch, understand whether it is the right time using the tips mentioned above.
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