Q: Hi Adhil. I took a Rs. 30 lakh home loan in 2016 for 15 years, but now I’m planning to shift to a repo-linked loan. While my existing bank is offering to do so after taking a one-time switching fee of Rs. 3000, another lender, whose current rates are slightly lower than my existing bank’s rate for repo loans, says my total transfer cost will come to around Rs. 12,500 to start a new loan. Can you help me decide which option to go for? – Jagadeesh
Ans: Hi, there. Shifting to a repo-linked home loan from a base lending rate or MCLR home loan could not just lower your EMIs but also your overall interest payout and help you become debt-free faster. That being said, a decision to refinance your home loan should be made after through calculations factoring in the change in your EMIs, your total interest payout and the cost of refinancing in terms of processing fee or switching charges.
Now, in your case, shifting to a new lender after transferring your loan balance could mean lower EMIs for the time being, but doing so would involve a higher switching fee and, more importantly, a lot of paperwork as you’ll start a new loan with a new bank. Converting your loan to a repo-linked one with your existing bank could be an easier process as it’s unlikely to involve additional paperwork. I would suggest take a decision based on the ease of transfer apart from the long-terms savings in EMIs and total interest.
There are two other critical things you must consider while making a switch. Firstly, don’t forget to check your credit score before initiating a switch because the repo-linked loans often involve a risk spread. Meaning, you’re likely to get the best interest rates only when you have a credit score of at least 750-800. If it’s lower, you might want to take some corrective measures like repaying all your dues and fixing any errors in your credit report before refinancing your loan. Secondly, do note that repo-linked loans will become expensive in the future when the repo rate is increased. As such, try to prepay as much as possible when the rates are low to reduce your overall loan burden.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards. Need help in calculating your EMI? Use BankBazaar’s easy home loan EMI calculator.