Wealth Spl: Switch home loan; save Rs 8 lakh

SWITCHING BANKS: If another lender offers you a lower EMI keeping other things constant, you stand to gain.

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Interest rates have finally cooled off a bit, with the RBI bringing down the CRR and repo rates recently.

Some banks have already announced rate cuts on loans and few others are following suit.

So, does it make financial sense to close your high cost home loan and shift to another bank that gives a lower interest rate?

Wealth addressed a reader’s query.

I had taken a home loan of Rs 9 lakh from ICICI bank in November 2004, at a 7 per cent floating interest rate for 20 years. Since then, interest rates have gone up considerably. Now, my Equated Monthly Instalment (EMI) has also increased and I have a remaining tenure of 23 years. I am planning to shift my loan to State Bank of India (SBI). They have offered almost the same EMI and for a 15 year tenure. Should I shift?

-- Tanmay Shastri

Yes, it makes money sense to take up SBI's offer. Here’s why:

You save time and money

1. Your remaining tenure with ICICI is 23 years and SBI is offering you a 15-year tenure (with EMIs being the same). By switching lenders, you will reduce your tenure by a good eight years! In other words, you have 96 fewer EMIs to pay back.

2. With a reduced tenure, you would also save money (and a significant amount at that), despite the loan foreclosure fee of around 2.5 per cent that you will pay ICICI and the loan-processing fee of around 0.5 per cent that you will pay your new lender, SBI.

How much will you save? Rs 8.17 lakh!

Let’s do some number crunching to see how.

In 2004, the interest rate was 7 per cent and in 2008, its around 12 per cent, hence, the average interest rate is around 9 per cent. So, the approximate principal amount you would have paid in the last four years would be around Rs 70,000. This leaves us with Rs 8.30 lakh as the loan amount that SBI will lend you.

Let’s compare the total EMI you will pay under both cases, that is, SBI and ICICI, to see your net savings on the loan.

*Approximate floating interest rate charged by the two lenders presently.

• Total outflow if you continue with ICICI (A) = Rs 24.47 lakh

• Total outflow if you switch to SBI (B) = Rs 16.30 lakh*

*This is the Total EMI to SBI + processing fee (to SBI) + loan foreclosure fee (to ICICI).

(Total EMI to SBI = Rs 16.05 lakh

Processing fee = 0.5 per cent x Rs 8.30 lakh = Rs 4,150

Loan foreclosure fee = Rs 8.30 lakh x 2.5 per cent = Rs 20,750

Total outflow = Rs 16.05 lakh + Rs 4,150 + Rs 20,750 = Rs 16.30 lakh)

-- Net savings from the switch = (A) – (B), that is, Rs 24.47 lakh minus Rs 16.30 lakh = Rs 8.17 lakh