These Questions Worry Every Home Loan Borrower

Ever since you became a borrower, you like to keep your eyes and ears open. Truth be told, you have no option but to be aware. How else are you going to repay your home loan fast and how else are you going to find out that there are changes that will help you bring down the total cost of the loan? In the middle of all this, various questions keep popping into your head as you are unsure of the implications of making a new move.

Here are five questions that keep popping into a home loan borrower's head repeatedly:

Should I switch to the new lending benchmark?

It was in 2015 that the new lending benchmark, the Marginal Cost of Funds-based Lending Rate (MCLR) system became applicable. Prior to that, borrowers were offered loans on base rate. In hopes of bringing down the total cost of the loan, existing borrowers do consider switching to the new lending benchmark. Owing to the confusion, however, most are refraining from doing that. In reality, switching to the new system will only be beneficial if it is done thoughtfully, considering all personal aspects; the one- size-fits-all theory does not work in matters of credit. To know whether switching to the new system will benefit you, read here.

Can I switch a partially disbursed loan to another bank?

In case of under-construction properties, banks issue the total loan amount in phases, depending on the progress of the project. Assume the bank has partially disbursed the loan and you pay a pre-EMI (equated monthly installment) for the same; the EMI payments start at a later stage. What if you find out that another bank is offering you a much lower rate of interest and would like to switch your loan? The answer is you can switch your loan even if your bank has partially disbursed it. For instance, if the bank has disbursed Rs 15 lakh of the total loan of Rs 40 lakh, you can switch Rs 25 lakh to a new lender. You also have the option to fully switch the loan. However, be ready for a long negotiation as the existing lender might be reluctant to oblige easily.

Do rate cuts by the RBI really help me?

Well, that depends, much of it upon what sort of loan you have taken. In case you have borrowed capital on a fixed rate of interest, rate cuts by the Reserve Bank of  India are not going to help you. The reductions are applicable only on loans taken on a floating rate of interest. But even then, there are only possibilities and not surety. It is only after your own lender decided to pass on to you the benefits that the generosity of the Central Bank makes any sense. There have been instances where banks did not reduce rates despite the RBI making several cuts. Assume your bank did implement the changes. This must benefit you, right? The answer is no. Your bank can always tweak the spread to make things work in its favour. For more on this, click here and here.

Is it not safer to stick with a fixed rate of interest?

So it looks, but that might not be the case after all. In your home loan agreement might be a clause that gives your lender the right to keep the interest rate fixed for a certain period, after which it can rejig the rate. Even if the existing agreement does not have such clause, it might have another one which gives your lender the same right – home loan agreements are subject to resetting time after time, depending upon the market conditions.

If I switch the loan, would my old bank take it adversely?

We do not want our existing lender to take it adversely in case we decide to part ways midway, especially because when we first took the loan the bank was really helpful. You did not have to pay as many visits to the bank branch as your friends did to get you home loan application approved. Would this bank refuse to offer you another loan if a need arises in future? The answer is negative. Be mindful of the fact that by offering you loan, banks are earning their income. They will not refuse you a loan in case you need it in future. However, do try to keep it cordial at the time of switching to a new lender. Just put your point across clearly and firmly without being aggressive.