With interest rates for new home loans hitting a 15-year low, many borrowers are looking out to transfer their existing loans to another lender who can offer better rates. Most of these transactions are, however, stuck. As banks and non-banking financial companies (NBFCs) continue to work with limited staff, the processing of such requests is quite slow.
Home loan transfers have virtually come to a standstill since the lockdown started. “We have received applications from many borrowers who want to do a balance transfer. The banks who would take on these loans have also offered a sanctioned letter. But the transactions are indefinitely stuck as the existing lender, the one where the borrower has an ongoing home loan, is not processing the required documents,” said Aditya Mishra, founder and CEO, Switchme.in, a platform that helps borrowers shift their home loans.
According to Mishra, between March and June, there was not even a single transaction that happened through his platform. A few lenders, where borrowers have an ongoing loan, started processing the requests in July.
When switching lenders, the borrower has to first approach the financial institution where the loan will be transferred. The lender evaluates the application and offers a sanction letter. This process can take up to two weeks. If you go through an intermediary, it may be faster.
To further process the transfer request, the new lender requires copies of the loan account statement, foreclosure letter and other property-related documents that are with the existing lender. Banks and NBFCs typically take two to four weeks to process such requests. Some do it only once a month.
Once the borrower submits the documents, the new lender issues a cheque in the name of the existing lender, which can again take up to two weeks. On submission of the cheque, the old lender hands over all the documents—the process can take up to three working days—and closes the loan account.
The borrower must approach the existing lender twice. “Things are stuck at the first stage where the borrower has to get the first set of documents. As the financial institutions know that they would lose a customer, they are going easy on processing such requests. As some governments have allowed offices to operate with only 10% of their regular staff, lenders are pointing towards the limited staff availability for not being able to process such applications,” said an intermediary, on the condition of anonymity.
According to people familiar with the industry, many private lenders had been facing shortage of field-work staff due to which they were not processing any loan-related requests until June-end. “Many of the field staff comes from tier-II and tier-III cities. They rely on public transport for their work. Due to the lockdown, many field staff went back to their respective hometowns. Those who are available, have to use private vehicles to attend calls. Due to such challenges lenders have been slow to process loan applications and other requests,” said Pankaj Bansal, vice-president and head, key account management, Bankbazaar, a marketplace for financial products.
In June and July, many public sector banks lowered their interest rates on housing loans. Most of the government banks such as State Bank of India are charging 6.7-7% onwards for home loans. This has piqued the interest of borrowers who want to benefit from lower rates.
Take the example of a borrower who has an outstanding loan of ₹50 lakh at an interest rate of 7.4% and has a remaining tenure of 15 years. If another lender offers him 50 basis points lower interest rates, he saves ₹2.53 lakh in interest outgo. The equated monthly instalment for the new loan will come down to ₹44,663 from the existing ₹46,067.
So switching indeed makes sense for a lot of borrowers.