What Stops Borrowers From Switching Lenders?

The option to switch banks is always open to home-loan borrowers. However, most borrowers refrain from going to another bank. They would rather stick with their current lender if it allows them to avail of the benefits of reduced rates. However, when they see a rival bank making one of the kindest cuts in interest rates, the temptation may only be too persistent to ignore. Most borrowers will still prefer to stay with their existing lender despite ruing the fact that rival banks are offering better deals. The fact is that getting your loan transferred to a new bank could be a hassling experience.  

• To begin with, there is no formal process set up in this regard by the Reserve Bank of India. Banks follow their own rules and regulations in this regard. This is also a reason why accepting such cases is quite a risk proposition for your new lender. For instance, your new bank will get the possession of the property papers only after it has paid the outstanding loan amount to your old bank. However, banks still go ahead and accept loan switchers in order to build a stronger customer base. This is true of all banks.

• Switching your lender is like applying for a fresh home loan. Hence, all the lengthy paperwork that you have done previously will have to be repeated. From filling the form to producing the copies of a multitude of papers that include identity proofs, income-related documents, tax-related papers, et cetera. Additionally, you will have to receive a no-objection certificate from your current lender, stating that it does not have an objection to you switching to a new lender. (Before you see that happen, your existing lender would do its level best to convince you to stick with it. Be ready for multiple rounds of long discussions in this regard. Also, you would not want to be hostile to your existing bank while you negotiate with them.) The bank will also have to issue an official letter stating the outstanding amount you owe. These two documents have to be given along with other papers and your loan application.

It is not only you who would be acting as a new applicant. Your new lenders will also have to treat your application as a fresh one and will have to scrutinise them thoroughly. This may lead to your new bank refusing to accept you as a customer. If you have not been diligent enough in repaying your loan, for instance, financial institutions will see you as a risky bet. In case there has been a reduction in your monthly income, the same might be true. In case the loan is co-owned and one of the applicants has stopped earning for any reason, banks may not be warm enough to lend you.

• There are monetary concerns, too. To switch your loan, you have to pay multiple charges, including processing fee, stamp duty, franking charges, notarisation charges, et cetera, which may add up to as much as one per cent of the total outstanding loan amount. A borrower has to do the calculation and decide whether the juice is worth the squeeze.

• Apart from the reasons mentioned above, borrowers also like to wait for their existing banks to reduce rates. A little patience in this regard can save them a lot of paper work and negotiations which can actually be quite a harrowing process. What if your current bank reduces rates right after you switch to a new lender? At least this is what the bank representative told you when you expressed your desire to go to another lender hoping for a better deal. Will the current lender accept you in case you want to come back? They sure would, as a matter of fact. However, frequent switching may not be perceived as a good sign as far as your banking portfolio goes.

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