Home loans: now is the time to renegotiate your loan terms
By Raj Khosla
As the second wave of the pandemic hits India, it’s time to review and rebalance your personal finance portfolio. Although different people have different priorities, saving extra money for emergencies is a wise step for everyone. With multiple monthly obligations such as EMI for home loans as well as essential daily expenses, the benefits of EMI burden reduction cannot be overstated.
Lower interest rate
Over the past year, mortgage interest rates have bottomed out and are currently at their ten-year low. With a little financial engineering, you can actually reduce your EMI. So, whether you received a loan before October 2019 or manage a home loan greater than 8.5% per annum, there is a good chance for a 100bp interest rate concession. However, in case you have opted for RBIrecent moratorium, it will be difficult to finalize a refinancing option.
Contact the existing lender
It is always recommended that you contact your existing lender first and apply for a rate concession based on your existing relationship and repayment history. Plus, you don’t need any documents to initiate claims with the current lender. You can contact your bank online and share your request, somewhat forcefully, i.e. sharing competitive market information. Additionally, if you are managing a fixed rate variant or an old MCLR linked loan, switching to an external benchmark such as the repo linked rate will reduce the interest rate. The lender will charge a nominal fee for the conversion and the new rates will be allocated according to the current pension rate.
Renegotiating with an existing lender is always the priority option. An illustration: A loan of Rs 1 crore at an interest rate of 8.5% and a tenor current of 15 years, carries an EMI of Rs 98,474. When reassessed to 6.75%, the EMI is Rs 88,491. A monthly saving of Rs 10,000.
Request a loan transfer
If the rate reduction request was not accepted by your existing bank, find another suitable lender. Look for post-disbursement services and responsive digital customer service in addition to the lower interest rate. Clearly communicate the terms and requirements of your loan with your new lender. A new loan agreement will be provided and processing and administration fees will apply.
So, do the math, calculate the savings, and specifically let the lender know your intention i.e. whether you are looking for an EMI reduction and tenor extension, or a debt consolidation supplement or capital reduction.
Previous benchmark example: If your age allows for a five-year extension of the tenor from 15 to 20, the loan of Rs 1 crore @ 6.75% will mean an EMI as low as Rs 76.036, resulting in a huge monthly saving of Rs 20,000.
Leveraged home loan supplement
The IMEs for personal loans, car loans are priced at higher interest rates (9-12% per annum) compared to 6.75% for home loans. Carrying over credit card balances is one of the most expensive sources of funding (18% -30% per year).
If age and income permit, an EMI of Rs 98,847 will secure a loan of Rs 1.3 crore @ 6.75% with a term of 20 years. From where a release of Rs 30 lakh to square the most expensive installations, then a possibility of surplus for a contingency fund.
Expect Covid Obstacles
Due to the lockdown, the banks work with limited physical force. It is not possible to personally visit a bank to share the balance transfer request and to file a request for a certificate of no objection (NOC). In addition, the new lender must complete a property appraisal and legal audit before authorizing a loan penalty. All of these steps require manual intervention. So be prepared for delays specific to Covid.
The writer is Founder and MD, MyMoneyMantra.com