Shreya took a 20 year home loan of Rs 50 lakhs 3 years back at a fixed interest rate of 10.5 %. Now, in the current falling interest scenario, most banks are offering loans at the rate of 9.00 % – 9.5 % p.a. Since the amount of loan is sizeable and she still has 17 years to go, she wants to explore if it makes sense to switch over to another loan provider and take advantage of the low interest rates. But, moving a loan is a time consuming and a cumbersome process, and there is a cost involved too. These are some things which people like her should know and evaluate before taking a decision to shift.
- Switching a loan is more effective if the loan is recent, as during the initial few years, one pays a higher percentage of interest and lower percentage of principal outstanding as EMI.
- Shifting a loan usually means doing almost all the paperwork again. So, one should evaluate how much he or she would actually save using an online calculator, by opting for the switch and whether doing so is really worth the effort.
- Most lenders are not that transparent, and while they are quick in increasing rates on a floating rate in a rising interest rate regime, the opposite isn’t true. So, even if you have a floating loan in a falling rate scenario, the benefits of the same may not be passed on to you by the lender and one may still have to consider switching.
- If there is a secular downtrend in interest rates which is expected to last for some time, it is advisable to wait for some time till the interest rate drop subsides. If there are significant rate cuts even after one has already done the switch, it will not be possible to go through the entire process of the switch all over again.
Very true but theoretically. Practically, the problem is in the initial stages of the loan, people would be in the process of adjusting the EMI burden into their monthly budget and hence, would not prefer to change over. Again anticipating a secular downtrend is tough to gauge and let us be frank many financial planners themselves would not be in a position to help the client in the matter.