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29 March, 2024 18:14 IST
Financial Planning
   
Time to shift your home loan
Source: IRIS (16-APR-15)

  We have seen two repo rate cuts of 25 bps in last 3 months. We have seen immediate reduction in borrowing rates by both banks and housing finance companies but nobody was ready to reduce the lending rate. The benefit of rate cut must be passed to the borrowers but unless there is some action from regulators nothing happens of its own. The strong message by RBI in its last review meeting forced the banks and housing finance companies to reduce the home loan interest. In past we have seen whenever there was a increase in repo rate immediately in 1-2 days the burden is passed to the borrowers but in case of rate cut benefit is not passed to borrowers. This is serious issue and RBI has to see that this does not happen in future. 

Loan and insurance planning are most important part of financial planning. Before jumping to investment, as a financial planner, I always first check the loan and insurance portfolio. The review of both existing loans and insurance according to clients needs is on top priority. Suggesting a suitable option improves the client’s monthly surplus for future investment. Buying own home is the top most priority of every Indian. People also upgrade their existing home and also buy second home for investment once cash flow improves. The trend is very natural as the home loans are available easily. The rate of interest is also competitive compared to other loans available in the market. There are tax benefits available for the payment of principal amount as well as for interest payment which reduces the cost of borrowing.

Home loan is a good loan which allows you create asset and also helps you in paying it in instalments. Even it is good you need to be careful and do some home work before opting for it and review the same. The following points will help you to take informed decision. Home loan is available from both PSU and private banks and also from housing finance companies like HDFC and LIC housing finance. Banks are governed by RBI whereas housing finance companies are governed by National Housing Bank. Banks follow base rate system whereas NHB follow Prime Lending Rate system. Interest rate calculation in Bank is base rate plus spread and in case of NHB it is prime lending rate minus spread. The base rate has direct relation to repo rate and hence it is advisable to take loan from banks and not from housing finance companies. 

Housing loan is also a DEBT and you should be very careful before taking this. Most of the borrowers do not understand the impact of interest payment and apply for the loan. There are different types of home loan available such as fixed rate, floating rate and dual rate of interest. You should be careful while opting for it in the beginning. As per guidelines by both the governing bodies there are no pre payment charges in case of floating rate of interest. There is prepayment charges in both fixed and dual rate (till the initial period of fixed rate) home loans. Therefore it is advisable to take floating rate loan as you can prepay your home loan or you can also shift the existing home loan to other lender who offers competitive deal.

The recent experience of rate cut tells us that it is advisable to shift the existing home loan if your lender has not reduced the base rate. It is also advisable to shift the home loan even if you have bought it under fixed rate by paying penalty for that. Lenders also pass the benefit by lowering your balance tenure for repayment instead of EMI. Here you should also be careful and check the EMI and balance tenure when there is change in repo rate. RBI has also to relook it and stop duration increase and decrease so that borrowers understand what exactly happens when there is some action from RBI.

There is also practise to charge the transfer fee to borrower by same lender for lowering the interest rate which highly objectionable. They are happy to lend to new customers at lower rate and for lowering existing borrower’s rate they ask for onetime fee. You should know that instead of paying fees to the same lender sometimes it makes sense to shift the loan to other lender. You might have to pay nominal processing fees for transfer which is much lower than transfer fees payable to same lender.

Transferring or shifting of existing outstanding home loan to from one lender to other lender is known as balance transfer. So if your lender is charging higher rate of interest compared to competitive rate of interest available in the market, you can opt for balance transfer option and reduce your EMI for the balance tenure. It is important to check Cibil score before applying for shifting any loan because higher score will give you ability to negotiate for the better deal in respect to interest rate and other charges. Don't allow lenders to charge you more and review your loan portfolio at earliest. 

(Pankaaj Maalde is a certified financial planner. He can be reached at
[email protected])




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