Personal Finance

Switching home loans may entail high penalty

Suresh Parthasarathy | Updated on September 03, 2011 Published on September 03, 2011

I have been trying to shift my home loan of around Rs 6 lakh. My EMI at IDBI Bank is Rs 9,385. The bank charges me 11.5 per cent interest and my remaining tenor is 94 months. For pre-closure, I have to pay 2 per cent of the outstanding amount.

I applied for an SBI home loan to shift the mortgage, for a term of five years. I will have to pay an EMI of Rs 13,000 and the interest will be 10.5 per cent.

I have been told that for the shift, SBI's advocates have insisted that IDBI allow them to verify the original documents of the property. When I approached IDBI, I was told that it is not practice to allow another bank to inspect the documents or the original.

IDBI confirmed that on payment of the loan, they will release the documents. Is this the practice of all banks? I have paid processing fee of Rs 2,500 to SBI.

Is it advisable to switch the home loan from IDBI or should I try to reduce my tenor with IDBI ?Venkat, Chennai

Interest rates on home loans have gone up recently and this has become worrying for borrowers. Due to higher EMIs, their monthly surplus is shrinking. Under this circumstance it may be prudent to close loans, or use other means such as swapping the loan by paying a one-time fee, or shift banks by paying a one-time fee. But evaluate the cost benefits before actually shifting the loan.

It's always advisable to shift the loan if you can bring down the interest spread by more than 2 per cent.

By shifting your loan you have to pay pre-closure penalty of 2 per cent on the outstanding and that works to Rs 12,000; besides your processing fees of Rs 2,500. Banks also collect Rs 5,000 as equitable mortgage registration charge. In all you have to pay Rs 19,500.

In practice, banks outsource legal or surveyor works. If you need to bear the cost of any one of them, then your outgo will increase.

Assuming that by moving to SBI you save one per cent, it will be Rs 58 per lakh. For a loan of Rs 6 lakh you save Rs 360 a month; and to recover your transfer cost it will take 54 months. If you approach your bank for a swap — even with a fee of one per cent (mostly its 0.5 per cent) — you need to pay Rs 6,000. You seem to be okay to pay higher EMI. Then isn't it better to pay an higher instalment to IDBI and close the loan in five years?

Now let us look at the document issue. Most lenders keep documents at remote locations and so retrieval may not be easy.

One option for the borrowers in such a situation is that if they hold another property, submit the documents of that as collateral till you settle the first loan.

If that is not an option, fix a date and insist that IDBI Bank allow the SBI advocate to inspect the documents on that date. If they still keep dodging, take the issue up with the bank ombudsman.

I have an education loan of around Rs 3 lakh. I completed my engineering and recently joined an MNC. I am drawing a salary of Rs 20,000 a month. My education loan interest is 12.75 per cent. Please advice.V. Hegde, Bangalore

As you are going to work only for eight months in the current financial year, your income will be less than the income chargeable for tax. You will not enjoy any tax benefit and so the interest cost will remain at 12.75 per cent. With equity markets also in the doldrums, you may find it difficult to earn post-tax return of 12.75 per cent from any investment option. Hence, it's prudent to pay any surplus towards the loan.

I approached a dealer to buy a motorcycle for Rs 75,000 and was told the dealer has a tie-up with HDFC Bank for loan. They told me that I have to pay Rs 15,000 and the rest can arranged as loan from the bank.

For a 48-month loan, my EMI works out to Rs 1,910. I have a credit card with the same bank.

I can use the card to get a cash-on-call loan up to Rs 50,000 at 1.25 per cent a month with a processing fee of 2 per cent. Which is the best option?Srikanth, Chennai

It seems to be better to take a cash loan against your credit card. Assume for a bank loan of Rs 60,000 you repay Rs 1,910 for 48 months, your cost of borrowing works out at 22.6 per cent. For a loan of Rs 60,000 you will be repaying Rs 91,680. But in the credit card loan, the interest cost of 1.25 per cent a month will work out to 15 per cent a year. For a loan of Rs 50,000 you will repay Rs 66,816. If you are able to manage the shortfall of Rs 10,000, go for the credit card loan and reduce the bank loan accordingly.

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