Don’t switch your lender in a hurry More than once you might have felt the urge to go with a new lender that promises you a better deal. But Aswathy Varughese tells you to take measured steps to avoid the temptation of falling for the bait

Don’t switch your lender in a hurry

More than once you might have felt the urge to go with a new lender that promises you a better deal. But Aswathy Varughese tells you to take measured steps to avoid the temptation of falling for the bait

Some may find the Reserve Bank of India’s interest rate status quo as a bit of a growth dampener. But the central bank’s move to slash the statutory liquidity ratio (SLR) — the amount that banks need to park in government securities —has actually come as a godsend for lenders as far as retail advances are concerned. This effectively means `60,000 crore will be released into the system, which comes as a shot in the arm for retail lending. Banks have been quick to lap it up — the State Bank of India, along with others, saw sense in passing on the benefit by making home and car loan rates cheaper. So, you may start wondering if it’s ideal time to shift to a softer rate regime. In the changing interest rate scenario, it’s the home and car loans that impact many the most. And there’s no dearth of advertisements in the market that promise you the moon with unbelievable offerings and lower EMIs. That is all the more reason why you need to get your math right if you are toying with the idea of casting your lot with another lender. First, let’s take you through the basics. Under fixed rates, your EMI and interest rate on loans stay fixed throughout the tenure. Floating ones, as the name suggests, however, are subject to change according to the prevailing rate environment. Logic speaks There is a near unanimity among experts that any change of course has to be backed by a meaty logic. The ideal candidates here may be the borrowers who have a loan tenure exceeding 10 years with the rate hovering in the range of 12% or more. Divya Nair is an apt case. A bank employee based in Mumbai, her EMI works out to `42,690 for a `40-lakh home loan with a floating rate of 12.5%. The loan has been repaid for five years. And with the tenure fixed at 30 years, the outstanding for her at this point stands at `39,15,270, to be precise. Acting on her friend’s advice, Divya decided to opt for a home loan lender that offered her a better deal at 10.5%. According to revised calculations, she now needs to shell out `35,815 per month on her loan outstanding and the balance tenure, much lower than what she used to pay earlier. In other words, the deal handed her a saving of as much as `6,875 a month. So, borrowers like her can choose this option, but the rider is loan outstanding and tenure. Conventional wisdom says it is better to take a call on a case to case basis rather than follow the herd. Here is what you need to track to stay well-hedged. Loan outstanding For customers with a larger loan outstanding and longer tenure, the reset for a lower rate is loaded with sense. Waiving off the prepayment penalty also turns out to be beneficial. “If the tenure left is significant, say, more than 5-7 years, it makes more sense for the borrower to shift. Ruling out of prepayment penalties is another motivation,” says Amar Pandit, CEO, My Financial Planner. Rate differential It’s paramount that savings on interest outgo should be considerable enough to justify the shift. Tenure left, loan outstanding, current and new rates and nature of loan should all be taken into consideration for calculating the interest rate differential. “People paying a higher rate as against the prevailing market average should look for such options to adjust the EMI and loan tenure,” adds Arnav Pandya, a Mumbai-based financial planner. The cost analysis There may not be any additional expenses for junking that existing loan. But the new deal with a lower rate more often than not comes with a cost, which includes processing, administrative and advocate fees for title investigation, stamp duty for loan agreement and other additional expenses that vary from bank to bank. The cost of shifting can be as low as 0.75% and go up to 2.5% in certain cases, which may defeat the very purpose of making the switch. This is one indicator that tells the bank how credit worthy you are. “People with low credit score will have a hard time while choosing a new lender. Negotiating the rates will be particularly difficult,” points out Sumeet Vaid, CEO Freedom Financial Planners. To sum up, any haste while choosing your lender could land you in a terrible soup. So, be advised to dot your i’s and cross your t’s as you recalibrate your rate calculus.