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Exercise caution before opting for loan transfer
Source : The Hindu Property Plus Published On : 2009-01-24 City : Chennai

Assess the credibility of the new financier and see if he has quoted a much lesser interest rate, says R.P. Deshpande

If your bank is charging interest rates on par with market rates and you are happy with the services offered and if some new bank/HFC is luring you with a little lesser interest rate (say one percent less than what you are paying now), please don’t be carried away by the sweet word of Home Loan Counselor. It will only help the Counselor, who will enjoy his commission without sweating. , as work involved in balance transfer is much less as compared to serving a new home loan.

If you are not comfortable with the present lender and you find that there is not much transparency in charging the interest on your loan and if an established bank or Home Finance Company having good reputation is offering you balance transfer at interest rate at least 1.5 per cent less than what you are paying now, only then it is advisable to shift you home loan account. Before you make your final decession, you need to workout the economics and consider the following:

Cost of prepayment: Normally all banks and HFCs charge 2-2.25 per cent penalty on the outstanding loan at the time of prepayment. The penalty is levied not only the present outstanding loan amount, but also on all part prepayments you have made in the last 12 months. Since it is a fee, it attracts 12.36 per cent service tax also, which is added to the penalty.

Cost of shifting: The bank or HFC which is taking over your loan account will invariably charge an upfront fee called processing fee and also you need to spend on legal and technical charges, if not included in the processing fee.

Cost of insurance: You might have not taken property insurance or mortgage redemption insurance (insurance on the life of borrower) or might have taken one of them. The bank or HFC which is taking over your home loan may insist on property insurance or mortgage redemption insurance.

Incidental costs: The bank or HFC which is taking over your loan account will seek loan outstanding statement, list of original property documents held and repayment track record from the bank or HFC where you have availed home loan. Further you may have to produce latest Khata, latest tax-paid receipt, nil Encumbrance Certificate, Valuation Certificate issued by a chartered engineer/architect etc.

The major benefits in shifting your account are lesser EMIs and saving on interest payable over a long period. Let us analyze the situation for Girish, a software professional working with an MNC, and see whether he should opt for balance transfer or not. He is earning a salary of Rs. 60,000 per month. He has taken a loan of Rs. 20 Lakh, to purchase a flat costing Rs. 25 Lakh, in 2006. When he took the loan the interest rate was 11 per cent but later on the lender increased the interest gradually to 13 per cent. Accordingly, his EMI has been increased from Rs. 19,968 to Rs. 23,410. Girish is not happy with the post-disbursement services and is convinced that the present lender’s dealings are not transparent and he is certain that the lender will not decrease the interest rate.

Girish has been approached by many home loan counselors who have suggested him to shift his home loan account to a particular bank. The rate of interest offered by these banks and HFCs are 12.5, 11.5 and 11 per cent respectively. The other terms as follows:

* No guarantors required

* Processing fee (including legal and technical charges) of one per cent of loan amount

*No prepayment charges
*Continuation of the insurance cover already availed.

Girish is paying an EMI of Rs. 23,410 and the outstanding loan of Rs. 19, 50,000. The balance repayment period is 18 years (216 months).

 
 

The expenses to shift the account are:

Processing Fee of 1 per cent = Rs. 19,500 + Service Tax of Rs. 2,410 (@ 12.36 per cent) = Rs. 21,910

Pre-closure penalty = Rs. 39,000 (@ 2 per cent) + Service Tax of Rs. 4,820 (@ 12.36 per cent) = Rs. 43,820

Incidental costs = Rs. 5,000 (approximate cost for latest Khata, latest tax-paid receipt, nil Encumbrance Certificate, Valuation Certificate)

Total = Rs. 70,730.

If he plans to shift to a particular bank, the calculations indicated in the table show the savings as follows:

In option 1, even 0.5 per cent less interest looks attractive, as Girish stands to save Rs. 74,206, as per the simple arithmetic. But it is not advisable to opt for balance transfer as his monthly burden will not ease considerably and he needs to spend Rs. 70,730 upfront and take the trouble of balance transfer process to save Rs. 74,206 over 18 long years. If he invests Rs. 70,730 in good instruments, he can earn monthly interest more than the savings in EMIs.

Similarly, in option 2, it appears Girish would stand to save Rs. 1,992 per month i.e. Rs. 430,272 over 18 years. After deducting the expenses of Rs. 70,730, the net savings would be Rs. 359,542.

In option 3, Girish stands to save Rs. 2,640 per month and total interest savings over 18 years works out to Rs. 570,240. After deducting the expenses of Rs. 70,730, the net savings would be Rs. 499,510.

(The author is a Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail.com)

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