Will You Switch Banks for Lower Home Loan Rates?

Conversion vs. Refinancing

SBI is especially offering the conversion option to people who have made up their mind to shift banks. Here, the customers need to make a trade-off between cost and benefit. Such customers need to assess all possible parameters and see which option is more profitable. If overall cost of switching banks is cheaper, then switch banks. If switching banks just increases your cost, change your mind of switching banks.

Narang says, "If the interest rate differential you are getting post switching your loan to another bank is substantial, it may make sense to switch, in spite of the prepayment and processing fee involved."

For example – you had taken a loan of Rs.50 lakh for 20 years, in January 2008, when the interest rate was 13.75 percent. The present bank interest rate is 11 percent. Here you have 2 options – First - If you select the conversion scheme, you can save Rs.16.67 lakh over the balance repayment time period. Second – if you decide to shift banks, your savings will differ based on the pre-payment penalty policy of your current bank. If you do pay the penalty fee, your savings will amount to Rs.17.21 lakh, including various charges. If the penalty fee is waived off for you, then you can save Rs.18.17 lakh.

Narang says, "While evaluating your savings from the switching option, you must look at the cumulative effect for the remaining tenure. You should also consider the service quality from the new bank and the documentation hassles involved."