Construction/Purchase of House requires substantial funds and repaying
in given time; and it attract normal equated monthly instalments. While some
other loans are required to repay in less than five years period and such loans
attract heavy equated monthly instalments; and this sort of facility is more
suitable to avail finance for repairs and renovations.
Due to the reduction of rates by the RBI, the normal lending
institutions/Banks are bound to reduce the interest rates on home loans, as
such, this is the most opportune time to transfer the loans to exploit the
benefit of low interest rates.
1.Low interest rates are based on tenure of the loan. Some financial
institutions link it to the amount of loan.Borrowers, who have availed loans at
higher interest rates, may examine the following parameters:
(a) balance outstanding;
(b) balance repayment period;
(c) equated monthly instalments affordable.
If the balance repayment period is less than five years, they may
transfer the loan to an institution which charges less than 9%. They may choose
to pay the same EMI, which they were paying earlier, so that loan gets closed
earlier resulting in considerable savings in interest. If not affordable, they
may also agree to repay the loan in 5 years with reduced EMI.
In case, the balance repayment is more than five years, examine the
balance outstanding and the EMI affordable; and in such case, if the balance
repayment period is more than 10 years, transfer the loans, where less interest
is charged.
2.While transferring the loans, consider the method of interest
calculations. There are various methods like:
-Annual reducing;
-Half-yearly
reducing;
-Quarterly
reducing;
-Monthly
reducing; and
-Daily
reducing methods.
Shifting from annual reducing to daily reducing in the present low
interest period is prudent to derive maximum benefits.
3.Timing of transfer:
Benefits may not be maximum,
unless the transfer of loan is properly timed. The borrower should ascertain the type and
date on which interest is charged. In case
of annual reducing method, the interest is charged on 31st March
every year. In case of monthly reducing, generally interest is charged to loan
on 5th of every month. As
such, transferring the loan on the day on which the interest is charged or
slightly earlier is advisable.
4. For closure penalty and admission charges:
Penalty of generally 1% on the outstanding balances is charged on loans
transferred. Similarly processing fee/admission charges are levied on incoming
loans. Compare the charges with the interest saved before requesting for transferring the loans.
Finally one has to decide whether to prefer floating rate or fixed rate on transfer. As the interest rates have
been reduced, fixed rate seems to be a better option, so that one may shift to
floating, in case of further reduction.
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