A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market.

Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market.

Such individuals could discuss with their bank on re-negotiating the interest rates based on the good repayment track record. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.

When the base rate system kicked in, loan borrowers had the option of shifting their existing loans to the base rate system in accordance with RBI norms.

Earlier banks had a benchmark prime lending rate, which is a reference interest rate on the basis of which the actual interest rate is determined.

The interest rate is usually X per cent plus or minus this benchmark prime lending rate and will correspondingly increase or decrease his EMI or loan tenure, at the time of applying for his loan.

This X per cent is termed as a ‘spread’, and is left to the discretion of the bank to set and depends on the other factors involved in loan eligibility like the credit profile of the loan seeker, for instance.

According to RBI regulations, banks are required to make changes in existing loans, when they change their existing BPLR.

However, since banks are given the freedom to set the spread from the BPLR at whatever value they choose for new customers, they were able to provide attractive rates to new customers while continuing to charge a much higher interest rate for older customers. RBI hopes that the new base rate system will usher in more transparency and check this trend.

Factors involved in loan transfer

When you are shifting your home loan the bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.

A prepayment penalty will be levied by your existing lender, which can vary anywhere between 2-5 per cent of the principal outstanding of the loan at the time of refinance. Remember that you will also need to pay a processing fee to the new lender. This can range anywhere between 0.5 per cent to 1per cent of the loan applied, most banks restrict this amount to Rs 5,000.

Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.

Starting this new year all major banks have increased their interest rates by 0.25 per cent to 0.75 per cent. More hikes are expected after the RBI monetary policy review slated for the end of January.

Hence it would be in the borrower’s best interest to wait it out till rates stabilise to choose an ideal deal for a switch. Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank etc. and a loan will be approved only when conditions are met.

Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:

* Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.
* Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.
* Service issues: Some-times you might just be unhappy with your bank’s service and accessibility, which might prompt a change.

(The writer is the CEO of bankbazaar.com)