When you take a home loan, you do a thorough analysis of the lender, home loan interest rates, EMIs, and more.
However, what happens when the home loan interest rates fall in the future? This means that the home loan interest rates you pay could be substantially higher than the market rate.
If you are in such a situation, you can switch your home loan provider. Changing your home loan provider will enable you to take advantage of the new rates and lower your home loan EMI.
However, before you switch, it is critical to consider a few factors, such as:
- Timing of the switch: Home loans are long-tenure loans, typically between 15 to 30 years. During the tenure, over 50% of your EMI consists of the home loan interest. You should make the switch during the initial years (ideally within four to five years). In the initial years, a large portion of your principal is outstanding as your EMIs comprise the interest component. With time, the interest component decreases, and the principal component goes up. Therefore, if you make the switch early on in your home loan tenure (five years or less), your interest savings will be insignificant. Online home loan EMI calculators can help you precisely know your EMIs.
- Interest rate differential: You should change your home loan provider when the interest you are paying is higher than the market rate. In this case, the home loan transfer to a new lender will reduce your EMIs. Also, home loan interest rates are revised each year. So, be careful when assessing the disparity in the interest charges. As per experts, you should switch your home loan lender if the new interest rate is at least 25 bps than your present home loan interest rate. However, if the remaining tenure is between 10 and 15 years, then the difference should be at least 50 bps or more.
- Other fees: You should not make your decision solely based on the difference in the home loan interest rates. You must factor in other costs, such as prepayment charges, penalties, foreclosure, etc. Apart from this, you would also be paying processing fees for your new home loan (1% of the outstanding home loan amount). Factor in these expenses and then weigh them against the difference in home loan interest rates to determine if it is beneficial to switch your home loan provider.
- Teaser schemes: When considering changing your current provider, be careful to check if the new lender is offering a teaser scheme or a permanently low home loan interest rate. Some lenders advertise low home loan interest rates and lure customers from their existing provider. These teaser schemes end after some time, and the home loan interest rates rise back to normal. However, by then, you might have already made the switch, gone through the documentation, paid the transfer charges, processing fees, etc. This defeats the sole purpose of switching the provider.
If you want to switch your home loan provider, be cautious of these factors and make an informed decision to lower your home loan interest rates.
You can use an online home loan EMI calculator to know the exact difference in the interest rates.