Precautions when transferring home loan
You can save upto 48 EMI's by transferring your home loan. However, as you choose a bank and a loan for the second time, make sure you make the right choice and you don't have to do this for a third time. You must understand the process for loan takeover from one bank to another. There are some important process and timing related precautions that will help you save money without hassles
In case the home loan that you plan to transfer is on an under construction property, you need to take some additional precautions about timing. These are also explained in detailed here.
- Check interest rate track record of the new lender You must check that the lower interest rate being advertised by the new lender is real and not a shot term gimmick. Please ask your loan advisor for the benchmark rate track record of the new lender.
- Satisfy yourself about service quality of the new lender Check that the service quality offered by the new bank you are choosing is up to your expectations. Lower rate should not come at the cost of inferior service.
- Check the benchmark rate There are two commonly used benchmark rates for home loans – base rate and prime lending rate. Base rate benchmarked loans are known to be more transparent and hence preferable over prime lending rate benchmarked loans.
- Is the spread variable or fixed Interest rate on floating rate loans consists of two parts – benchmark rate and spread above it. While the benchmark rate is expected to change over time, the spread is supposed to remain constant except in case of a default. However, some banks offer floating rate loan with both the benchmark and the spread being variable. In case of many such loans, borrowers see their loan interest rates rise sharply after a few months. So, avoid loans with variable spreads and instead opt for floating rate loans that vary interest rate only with change in the benchmark rate.
- Estimate transaction cost You must check that the lower interest rate being advertised by the new lender is real and not a shot term gimmick. Please ask your loan advisor for the benchmark rate track record of the new lender.
- Issue notice to existing bank Some banks insist on a prior notice before you can prepay your home loan. Check your loan agreement carefully and ensure that due notice is given to or waived by your existing bank.
- Check loan eligibility as per new bank Cost of property consists of multiple heads such as basic price, preferred location charge (PLC), external development charges, internal development charges, security deposit, electrification charges, power back-up charges, service tax, fire fighting charges etc. Norms for inclusion of each cost head differ across lenders. In case your chosen new bank does not include some of the heads in the cost of property which were included by the old bank, the loan eligibility may come down and you may need to increase your own contribution.
- Select the right time to do the loan transfer The process of loan transfer may take 10-15 days from the date of application and your existing bank may typically take another 10-20 days to handover property documents to the new bank. You will not be able to avail further loan disbursements during this period. Hence, it is important you time the transfer of your loan at a time when you don't expect any fresh demand from the builder for the next month or so.
- Get fresh Permission to Mortgage and Tri-partite agreement Your builder will need to issue a fresh permission to mortgage (PTM) to the new bank and enter into a new permission to mortgage. This typically takes no more than 2-5 days but borrowers must check with the builder.
In summary, balance transfer is beneficial to borrowers as it helps reduce cost of borrowing significantly. Home buyers and home loan borrowers must exercise caution in the process of balance transfer so that the process is smooth.
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