Some tips to help you decide if switching to another bank will work well for you
Many public sector banks have lowered their lending rates. The new eight percent rate is bound to be frozen at this level for a year. This is a lucrative deal for people contemplating to buy their own home as property prices have also corrected. To remain competitive in the market, it is predicted that other banks may soon follow suit.

Some borrowers seriously contemplate switching their banks when there are no signs of a rate cut. Is switching the lender a wise deal? Akash has taken a Rs 40 lakhs loan at a floating rate of 13 percent a year ago. The loan tenure is 10 years. Should he switch to a bank offering 10 percent floating rate? For Akash, balance transfer or switching to another lender seems to be the only way to benefit from the current lowering interest regime.

Ensure substantial EMI difference

Switching a lender for a 0.25 or 0.5 percent rate difference may not be a great idea. The actual benefit you get from switching the lender may not be substantial in terms of monthly EMI outflows.

Consider the outstanding principal amount is Rs 35 lakhs. At 13 percent floating rate, the borrower owes Rs 55,138 for a tenure of nine years. At 12.75 percent, the EMI due to the lender could be Rs 54,636. Considering other switching fees, the benefit of switching might be insignificant.

Factor in penalties

Most banks charge a prepayment penalty if the borrower decides to switch his lender. This amount could be as much as two percent if the borrower decides to refinance rather than repay the lender with his own savings. Two percent of an outstanding principal amount of Rs 35 lakhs means a penalty of Rs 70,000.

Switching comes with a fee

The new lender may charge a processing fee to take over the loan. It can be about 0.50 to one percent of the total loan amount. Apart from this you may incur some stamp duty and other expenses. Do not forget to takes these additional expenses into account when deciding on the merits of switching. Your new lender may also ask you to obtain a fresh set of NOCs, which may come at an additional cost.

Do your investigation

All lenders do not reduce their rates at the same time. If you switch to a lower rate and realise that your old lender had just reduced rates, your entire switching exercise might be a waste. Explore if the new lender has always systematically passed on rate cuts to his customers.

Do not switch frequently

Some people may be tempted to switch if their lenders hike their rates too often. However, switching lenders very often can only mean loss in the form of penalties and fees. Moving from a floating to a hybrid loan may not be a bad idea.

Balance transfer ideal in initial period

If you are at the fag end of your loan tenure, it makes little sense to switch. This is because a huge chunk of your EMI repayment goes towards the interest component in the initial years.