HaatBeatBeyond the numbers
The maths shows one side. These are the things only you can weigh.
- Paperwork and timeSwitching means documents, valuations and a few weeks of follow-up. For some people the saving is easily worth it; for others the hassle matters.
- Service you trustA lender who answers quickly and handles problems well has value that a rate alone does not show.
- Teaser ratesSome low rates rise after an introductory period. Check how the rate is set and how it can change.
- Bundled productsOffers sometimes come with insurance or accounts you did not ask for. Include their cost, or ask to leave them out.
- Asking costs nothingA polite request to your current lender for a better rate is often the easiest saving of all.
How it's calculated
P is the outstanding balance, i the monthly rate (yearly rate ÷ 12) and n the months left. Both loans keep the same balance and remaining tenure, so the difference in EMIs over the remaining months, less the one-off cost, is the saving.
Assumptions
- The same balance and remaining tenure on both loans.
- Fixed rates for the rest of the loan; floating rates can change over time.
- All switching costs are paid once at the start and not added to the loan.
- The time value of money is ignored: rupees saved later are counted at face value.
Worked example
A 40 lakh rupee balance with 15 years left: moving from 9.5% to 8.5% lowers the EMI from about 41,769 to 39,390 rupees a month. After 25,000 rupees of switching costs, it saves about 4.03 lakh rupees over the remaining term, and the cost is recovered in 11 months.
Questions
How big a rate cut makes switching worthwhile?
It depends on the balance, the years left and the costs. Larger balances and longer remaining terms make even a small cut worthwhile; near the end of a loan, it rarely is.
Should I ask my current lender first?
Many lenders will lower the rate for existing customers for a small fee. That avoids most switching costs; enter that fee and the offered rate to compare.
What about keeping the same EMI instead?
Keeping the old EMI at the lower rate ends the loan sooner and saves more interest. The loan prepayment calculator shows the effect of paying more each month.
Are there hidden costs?
Processing fees, legal and valuation charges, stamp duty on new paperwork and sometimes insurance bundled with the loan. Ask for the full list in writing.