What’s the right time to change your home loan lender?

Rishi Mehra

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Home loan is a long-term contract between a borrower and a lender. However, over the past couple of years regulatory changes have made it easier for the borrower to switch his/her outstanding home loan to another lender if he/she is not happy with the existing one. There is no more pre-closure penalties that banks can levy on customers who want to switch their loans to another bank.

Though changing the lender is a convenient option, one should use it only under certain situations which make the effort worthwhile. We enlist a few situations when one should change the existing lender.

When your bank takes longer time to reduce rates

Some banks react faster than others when it comes to reducing lending rates after the RBI has cut the policy rates. The cost of funds can be different for different banks. If your bank has a history of reacting slowly to policy rate cuts, look for another bank.

When your bank gives a raw deal to existing customers

Despite RBI's reservation, some banks/housing finance companies continue to discriminate between new and existing customers when it comes to passing on the benefits of reduced interest rates. If your lender is not allowing you to shift your loan to lower rates offered to new customers, it's time you call it a quit.

When switching to a new rate within the bank is costlier

Banks usually allow borrowers to switch the home loan to lower rate by charging a processing fee. If the same rate or lower is offered by another bank by charging a lower processing fee, you might well think of switching your loan to that bank.

When rate differential is substantial

Switching your home loan to a new bank means additional paper work, many visits to bank branches and a processing fee. If the rate differential is just 0.5-0.10% point, it may not be worth taking the pain to switch the loan to a new bank.

Calculate the interest rate that you may save by switching to a new bank at lower rate if the rate remains unchanged for full tenure. If the total savings in the interest is less than, say Rs 1 lakh, you should wait for the rate differential to get bigger.

You can use another parameter -the change in tenure on switching to a new bank on lower rate. If the tenure of the loan does not come down by at least 12 months, probably you should wait for the rate differential to get bigger.

When services of the existing bank are not satisfactory

At times it's not just rate of interest which makes you change your bank, it's also the quality of services that matters. Even simple discomforts such as delayed issuance of statement for taxation purpose, complex nature of statement (where it is tough to calculate the total annual principal and interest paid), etc can also force one to change the bank.

It is much easier now-a-days to switch the home loan to another bank.

However, the decision should not be based entirely on interest rates.

Quality of services and customer satisfaction track record also are significant parameters to look for before changing the bank or lender.

The author is co-founder, deal4loans.com. The views expressed in this article are his own