Sunday, March 1, 2009

Switching Banks: Take a decision based on the remaining tenure, penalty and processing charges

Just because another bank is offering lower rates, it may not make sense to shift:

You need to look many other factors:

1) Prepayment and foreclosure charges:

Already reports suggest that Housing Development Finance Corporation (HDFC) has hiked its foreclosure charges to 3 per cent to discourage existing borrowers from shifting.

2) Processing charges of the new loan:

Most institutions will charge anywhere between 0.4-1 per cent (average being 0.5 per cent) of the loan amount. You must add these charges to the outstanding loan amount to determine the accurate equated monthly instalment (EMI).

3) Outstanding tenure of the loan:

The tenure of the loan is the key in determining whether switching would make sense.

If the remaining tenure of the loan is more than 15 years, or if you have taken the loan in the last 2-3 years, even a 2 per cent discount to your existing loan will translate into a lot of savings.

In other words, if the interest rate discount is 2 per cent or more and your remaining tenure is over 14 years, you must switch the loan. At the same time, if the remaining tenure is 10-12 years, the benefits, though sizeable will not be as high.

4) Value of your flat:

Banks are more likely to value the same house at 20 per cent less. And then, give 70-80 per cent of the new value. Clearly, that means that you will need to shell out a large amount from your own pocket.

Worse still, if there is more correction, the bank has the option to ask you to cough out the more money otherwise you will be put in the defaulter's list

5) Time spent on paperwork and effort:

Besides, the technicalities and number crunching, there will be a lot of time spent on paperwork and effort, as you now have to deal with two banks.

6) Check with your existing bank:

First, check with your existing bank whether they are offering you a lower interest rate. Competitive banks, who don't want to lose a customer, will refinance your existing loan by charging a penalty and refinance fees.
To read more, please, visit - Amar Pandit-Business-Standard

What is your take on switching banks?

Is "switching banks" becoming time consuming and rather painful experience? Please, share your experience and tips in the comments. (Comments Policy)

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