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.
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;
© 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:
Shifting
from annual reducing to daily reducing in the present low interest period is
prudent to derive maximum benefits.
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.
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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