In the present competitive world nobody is exception and in
tune with this concept even the financial institutions which have been running after
"further improvement of bottom line" of their financial statements also
adopting every technique to lure the valued clientele including welcoming takeover
of loans from its competitors.
Naturally, when there are signs of "even a small element
of benefit" on switch over to other financier, the consumer/client will not have any sort of hesitation in grabbing the opportunity. The analysis also show that at times
switching over from one lender to another, certainly there exists some sort of
benefit and even at times may be a most economical loan option.
A study on "home loans" reveal that, the tenure
of repayment being long, in as much as ranging from 5 years to 20 years, it is certain
that the market conditions are likely to fluctuate leaving impact on the
consumer on certain areas like -interest rates, repayment options, penal charges etc. Hence, the prudent customer after taking into consideration these factors
shall avail the opportunity of switch over to such financier, in order to reap
the benefits.
Broadly, switching denotes changing in terms & conditions
of the loan by either opting for another scheme or changing the financier
itself. While doing so, one should bear in mind that it entails some sort of expenses
to be borne which one should weigh against the benefits that may accrue on such
switch
Applicability of interest rate:
Broadly the interest rates are of two types i.e., "Fixed"
or "Floating". The customer has to choose either of the above at the
time of a ailment of housing loan itself, which shall remain for the entire
tenure of repayment. In the process, if the interest rates are decreased, the
customer who opted for "fixed" rate of interest may tend to start thinking
of availing the other method of "floating" rate of interest. On the
other hand, the customer who opted for "floating" rate of interest shall
be worried on every occasion whenever there is an increase in rate of interest
and start thinking about "fixed" interest scheme. So, ultimate
weighing of benefit should be worked out in the backdrop of fact that there remains
a certain cost benefit in switch over, if not immediately but at least in long
run.
In order to ensure that customers shall remain with them,
many financial institutions are allowing their customers to switch schemes on
the payment of a processing fee of half to one percent of the outstanding principal.
Anyhow while some lenders do not allow switches from variable to fixed rate schemes,
some others restrict the number of switches over the tenure of the loan. In such
cases, the option open is considering switch over to another lender, especially
when the prevailing market rate is more than two percent lower than the rate on the housing loan. However, it should also be considered whether it is a long
term trend or a short term phenomenon before going in for the switch over.
Suitable repayment options:
More beneficial and innovative schemes are appearing in
the housing loan market, as it grows and develops. To benefit and suit various
classes of borrowers, the repayment options are being customized. The stepped
up repayment plans allow one to start with lower EMI payments and increase them
as one's income increases over the years. In stepped down repayment schemes, one
pays larger EMIs at the beginning of the term, decreasing the payments as the financial
burdens increase. Hybrid loans partially hedge against market rate fluctuations
by dividing the principal into fixed and variable rate portions. Account linked
loans permit one to benefit from regular credits into the account by linking the
principal to the balance to the account. Better schemes make one consider
switching across schemes or across lenders. In some of the above cases, the
quantitative benefits may be smaller or difficult to judge, but one may be more
with hedging one's risks or taking a stepped down repayment plan. In such cases,
taking a wise decision based on personal requirements would be very prudent.
Overhead expenses:
When one decided on switching between lenders, it naturally
entails closing the loan with the current lender and approaching a new lender for a fresh loan. But this attracts foreclosure charges (anything between 1 to
4 percent of outstanding principal) levied by the current lender and processing
fees (between 0.50 to 1.00 percent) levied by the new lender. These costs must
be weighed against the savings in EMI payments resulting from switching before
going for the switch. This could be easily worked out by the lender, based on
the outstanding principal and remaining term.
In addition to this, all the paper work with the new lender
has to be completed, and the property documents have to be transferred. Though
it is a procedure which demands planning and working out, it is well worth the additional
effort.
Before switching, the market outlook and personal circumstances
also need to be considered elaborately. For instance, one may be attracted
towards switching to a fixed rate, if rates have been increasing in the short
term and if the long-term trend is a decrease in market rates one may wish to
reconsider.
Hence, so many factors are in for consideration before
one decided for switching. But, it is absolutely important to monitor and
manage the loan during its tenure to ensure that one avails the benefits accruing
out from interest rate fluctuations or market developments.
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