What is the best time to switch Housing Loans?

Many existing borrowers are looking to switch their home loan to another lender in order to take advantage of the new rate and lower their EMIs. When done properly, refinancing can be very beneficial. However, before Rajneesh goes any further, he must carry out a thorough cost benefit analysis. It is important to time the loan refinancing in a way that saving on interest payable is maximised.

Rajneesh is likely to find switching lucrative as only five years of his loan tenure are over, which means a large portion of his principal is outstanding, as his EMI is mostly made up of the interest component. With time, the interest component comes down and principal component goes up.

There is no prepayment charge on floating rate loans, but some fixed rate loans may have it. Rajneesh must check if his bank will levy the same if he were to prepay and switch lenders. The loan processing charge of the new lender is the second part of the cost that should also be considered. A high processing fee may make the new loan quite expensive. Rajneesh must also consider the hassles of repeated paper work that goes into transferring the home loan from one bank to another.

Therefore, instead of making the switch decision by purely considering the interest rate differential, Rajneesh must make sure that he factors in all these costs when computing the potential savings. Needless to say, refinancing is a profitable move only when the potential savings in the long run are significant.