The rate hikes are here. Should you change your mortgage now?
Has the interest rate on your home loan become expensive by 10 to 30 basis points, or basis points (one basis point equals one hundredth of a percentage point) in the past few weeks? This is the result of the recent 40 basis point hike in the repo rate by the Reserve Bank of India (RBI). The revised repo rate currently stands at 4.40%. Are you considering switching to a lender offering cheaper rates? Experts warn against this decision.
“Rates are expected to rise further and it is only a matter of time before all lenders raise their interest rates on repo rate linked loans. Borrowers should wait and watch for a few months before making a decision. More importantly, the switch would only make sense if you get at least 40 to 50 basis points lower,” said Amit Suri, a Delhi-based financial planner.
Raj Khosla, Founder and MD, MyMoneyMantra.com, said: “Borrowers tend to shop around and possibly switch lenders after a rate hike because they can take advantage of a potentially lower interest rate. Depending on the rate differential, the savings can be significant for a borrower. For example, for a 20-year home loan of ₹75 lakh, 0.5% rate differential can lead to savings of ₹5.5 million.”
The remaining term of the loan is also another important factor in deciding whether the change makes sense.
If you only have 1-2 years left to pay off the loan, do a cost analysis of what you’ll save versus the fees you’ll pay by switching.
Switching to another lender incurs a processing fee of 0-1% of the loan amount or a flat fee of ₹3,000-11,000. Some lenders may even charge a conversion fee of 0.25-0.75% of the outstanding principal or a flat fee, usually capped at ₹50,000.
Other key miscellaneous costs include stamp duty and fees paid to technical assessors or attorneys.
Customers should also check whether the new lender can charge a prepayment fee or not, in case you want to close your loan early.
Borrowers with high credit ratings have the option of negotiating a lower price with their current lender before turning to other lenders, according to Khosla.
“A client is advised to contact their existing lender for a repricing of the existing loan. Lenders tend to price match the competition, especially for good quality borrowers.”
Khosla, however, said a slightly lower rate shouldn’t be the main reason for switching, especially if the lender is a good service provider. “Since a home loan is usually a long-term association, borrowers should also assess the quality of service before finally deciding to switch lenders.”