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Thursday, September 25, 2008

Did your home loan just get more expensive?

Home loans with floating interest rates can be tricky; the moment you take the loan, the rate seems to start climbing upwards.

We outline some smart tips to help folks like Jaidev get the best deal.

Step 1: negotiate with your bank
Before taking business to another bank, negotiate for a lower rate with your current vendor. They mya have a better plan.

Clayton Scott, the Director of Ecompare.co.in, a financial products comparison web site suggests, “There are banks that allow switching at the time of annual review of accounts, at no extra cost. There are others that allow such switches but at a cost of around 1.5% of the outstanding loan amount.”

This is a good option for refinancing your home loan, as it's quick and involves fewer formalities.

Step 2: negotiate for lower charges
If your bank lets you switch to a lower interest rate plan for no charge, you are in luck. But if they do charge a fee, you should negotiate for a lower rate.

These charges, however, come with clauses like this one: the pre-payment fee is waived only if you are repaying the loan from your own pocket. In other words, you have to shell out a pre-payment fee if another bank refinances you.

Read: Tips to lower your Home Loan EMI Burden

Step 3: compare banks
It's a smart idea to compare the charges offered by your bank and other bank. This will help you negotiate better interest rates, processing fees and charges levied by other banks on refinanced loans.

Other charges by a new bank include a processing fee of about 0.5 to 1% of the loan amount. Ask for this percentage to be further reduced or waived.

Harsh Vardhan Roongta, CEO of apnaloan.com says, “Generally, it works out better if you have about 10 or more years of the repayment period left. Opt for the switch only if the new loan rate is cheaper by at least 0.5% and the pre-payment fee is not more than 2%.”

Step 4: evaluate your position
If you have many years of repayment (say 10 - 15 or more) tenure remaining and even if the new rate is 1% cheaper than current interest rate it is definitely beneficial. The processing fee is not high. The new lender has agreed to lower his pre-payment fee to only 1% of the outstanding principal. Overall, it makes sense for you to make the switch.

Step 5: the refinancing process
Make sure you hand over all original documents of the house to your new lender. The bank’s lawyer will then scrutinise your papers for a fee. This fee could be anywhere between Rs 1,500 and Rs 2,000.

The new bank may want to revaluate your property based on the location and condition of your property. The revaluation charge is approximately Rs 1,500, but can vary from bank to bank.

The refinancing process could take between seven to 10 working days depending on the bank you’re dealing with.

Here's a look at charges at a glance.
Type of charge Approximate cost
Processing fee 0.5 to 1% of the loan amount
Documentation fee Rs 1,500 to Rs 2,000
Revaluation fee Rs 1,500

Can the new lender up the interest rate, again?

“Yes, then the consumer has no option really. If your bank revises the rates it will be for all the consumers and not for you alone. You’ll share the fate of thousands of other consumers,' says Roongta.

Scott asks all consumers to exercise caution, “Never assume that a bank will help you switch to the most favourable interest rate prevailing in the market. It's your responsibility to stay abreast with current market rates and switch when it is in your best interest and when permitted to do so under the terms of the loan agreement.”

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