Construction/Purchase of Houserequires substantial funds and repaying in given time; and it attract normalequated 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.
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:
(b) balance repayment period;
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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.
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.
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.
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.
More,
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