In the case of an ongoing loan with a term of more than 10 years, a difference of 50 basis points (bps) can lead to considerable savings. Take the example of a borrower with an outstanding loan from ₹50 lakh at an interest rate of 7.4% and the remaining term is 15 years. If another lender offers him 50 basis points lower interest, he will save approx. ₹2.53 lakh in interest expenses (see chart). One bps is one hundredth of a percentage point. Remember to take into account the applicable fees and Stamp duty Fees.
However, the process of changing your credit balance can be challenging and time consuming. We’ll tell you how it works and what challenges you can face.
When switching lenders, the borrower must first contact the financial institution to which the loan is being transferred. The new lender evaluates the application and offers a sanction letter. This process can take up to two weeks. If you go through an intermediary, it can go faster.
In order to process the transfer application further, the new lender needs copies of the document list (LOD) and the credit account statements. Banks and Non-Bank Financial Firms (NBFCs) typically take two to four weeks to process such requests. Some lenders only process such requests once a month.
It is best to apply for the foreclosure letter yourself at this stage (although you can file it anytime before the final check is issued) as lenders will need time to issue. Some lenders have loyalty teams that try first to get the customer to move on. A foreclosure letter will state the amount that is required to close the loan.
As soon as the new lender receives the first documents, he will request further real estate-related documents such as a copy of the registered contract. The second set of documents is required to start the legal and evaluation process, which can take up to two weeks before the final sanction and settlement. After going through this process, the new lender will write a check on behalf of the existing lender.
After receiving the check, the old lender closes the loan and after two weeks gives the customer the original documents for presentation to the new lender.
However, in the current scenario, performing a balance transfer can be a bit of a challenge. As banks and NBFCs continue to operate with limited staff, the processing of many such requests has become slow.
Home loan transfers have practically stalled since the lockdown began. “We have received requests from many borrowers who want to transfer funds. The banks that would take out these loans have also offered a sanction letter. But the transactions are stuck indefinitely because the existing lender where the borrower has an ongoing home loan is not processing the required documents, “Aditya Mishra, founder and CEO of Switchme.in, a platform that helps borrowers told her Home relocate loans.
Not even a single transaction took place on the platform between March and June. Some lenders with borrowers having an ongoing loan started processing applications in July. However, all eligible borrowers on the platform have received sanction letters and are waiting for their lenders to initiate the transfer process.
“Things are stuck at the stage when the borrower needs to receive the first documents. Since the financial institutions know that they would lose a customer, they are careful when processing such inquiries. Since some state governments have allowed the offices to work with only 10% of their permanent staff, the lenders point out the limited availability of staff because they cannot process such applications, “Mishra said.
The problem is more pronounced in large subways. “There is a balance transfer in some centers, but it takes much longer in the subways. Some of the largest lenders in the country haven’t processed an application, “said Gaurav Gupta, CEO of Myloancare, a loan and credit card marketplace.
According to industry insiders, many private lenders faced a shortage of sales force that prevented them from processing loan applications until the end of June. “Many of the sales representatives come from Tier II and Tier III cities. They depend on public transport for their work. Because of the lockdown, many have returned to their hometowns. Those who are available will have to use private vehicles to take calls. Because of these challenges, lenders have been slow to process loan applications and other inquiries, “said Pankaj Bansal, vice president and head of key account management for Bankbazaar, a marketplace for financial products.
What to remember
Since fees and charges apply, switching only makes sense if there is a difference of at least 50 bps between the new and the old lender. “Although the switching is case-specific, the difference should be at least 50-75 bps. As a rule of thumb, if the tenure is less than 10 years, the difference should be 75bps, and if it’s more, it should be 50bps, “Gupta said.
Also, stamp duty fees (on the new lender’s mortgage document) can make a significant difference in the cost of switching to a borrower in some states, Gupta added. According to him, states like Andhra Pradesh and Telangana charge 0.5% (of the loan amount) in stamp duty, Maharashtra has 0.2%, and Delhi, Uttar Pradesh and Haryana charge a small flat fee (in a few hundred). While PSBs may receive a discount on the processing fee, their legal and technical fees are higher than those of private lenders.
While switching lender could be a lengthy process in the current environment, those currently using the marginal cost of fund-based lending rate (MCLR) should consider switching to a repo-based loan. “If your MCLR home loan isn’t being reset anytime soon, it is best to switch from MCLR to repo rate with the same lender. It’s not just about the cost. The change to an external benchmark brings more transparency to interest rate developments, “said Bansal.
If you decide to switch, think about the turnaround time and use an online calculator to calculate the savings after various fees have been deducted.
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