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Home Loans: Are you paying more

If your repayments track record is spotless, you can exercise the option- prepayment and shifting to new lender.

Harsh Roongta

07 Apr 2008

If your repayments track record is spotless, you can exercise the option- prepayment and shifting to new lender.

The trigger for this decision is quite obvious. Most home loan borrowers in the last 5 years have taken floating rate loans and banks have revised the interest rates on these loans. In the current scenario we notice that banks have reduced interest rates which they are offering to new customers where as old customers continue to pay the same (higher) rates.

Like many home buyers, who thought they were fortunate to have a floating rate loan at 7 per cent in 2003, are now finding that their sense of "luck" was misplaced. Banks are now charging them around 11.50 per cent interest rate. If the loan was for Rs. 10 lakh and the original tenure of the loan was 20 years, the increased rates would change the EMI from Rs 7753 to more than Rs 10,000 or if one was to keep the EMI amount same, then the tenure would increase by more than 10 years. Typically, banks would let the tenure increase to a maximum of 25 years.

Now the time has come that you talk to your lender. As mentioned earlier, your repayment track record has to be spotless. Now you can request your lender to offer you the same rate which is being offered to their own new customers. However your lender may charge a small fee for shifting your loan to a lower rate.

In case your lender seems reluctant, then you can certainly consider the other option of shifting the home loan to another lender offering lesser rates. And you can tell your existing lender!

But keep in mind that this shift may make you incur costs like- prepayment fee payable to existing lender and processing fee payable to new lender, besides administrative costs. You will be required to furnish NOC from the society or builder, whichever is applicable in your case, on payment of a fee.

As there is a time gap between switching from one lender to another, you will be required to furnish a letter from your existing lender stating that they will release the documents within a stipulated time frame after full payment is made and also specifying that amount that will be required as full and final payment. This letter will enable the new lender to consider releasing the payment directly to your existing lender.