The interest rates have been going down for over a year now. I have written many times about how banks and housing finance companies are reluctant to pass on the lower rates or move you to a more transparent interest rate regime (Base Rate to MCLR or MCLR to Repo Rate Linked loans). Even if they are willing, they might want to extract a pound of flesh by charging you a hefty switching fee. However, that may not always be the case. You must do a cost-benefit analysis to figure out if switching is a good choice.

However, before the bank’s discretion comes into picture, you need to take a step. First, you must ask your Bank for a lower rate. The lender will not offer you a lower rate on their own.

I will share a recent incident. I was working with an investor and he was very inclined to repay his home loan soon. The outstanding loan amount was big (~67 lacs) and he could not have prepaid the entire loan amount at one go. I noticed the loan interest rate was 8.2% p.a. Given the prevailing interest rates and his credit profile, the interest rate looked on the higher side. I asked him to reach out to the lender and check if he could get a lower interest rate and the associated switching fee. The lender replied within a day that he could reduce the loan interest from 8.2% to 7.1% by paying a switching fee of ~Rs 3,000. That’s it. The loan was with a Housing Finance company. The lender adjusted the loan spread downward after the fee payment. And the savings are massive. And it is a no-brainer. You do not need a spreadsheet software to figure this out.

## What Is the Impact?

The number of outstanding EMIs went down from 154 to 140 (The EMI remained unchanged at Rs 70,376). Hence, a payment of Rs 3,000 saves 14 X 70,376 = Rs 9.85 lacs over the remaining loan tenure. Had the tenure remained constant and the EMI changed, the EMI would have gone down to Rs 66,329. EMI goes down by Rs 4,046. You recover the switching fee in just one month.

## Why Didn’t the Lender Approach the Borrower Earlier?

Valid point. The banks keep calling you and sending you e-mails for all kinds of promotions (credit card, loans etc). Not in this case. It is unlikely that any promotion will save you the quantum of money that this communication about lowering of interest rate would have done. The lender did not reach out to the borrower. It responded with an offer only when the borrower asked.

This issue has also been raised before. Why shouldn’t lenders reach out to borrowers suo moto? Clearly, the banks/NBFC/HFCs lose out on higher income. Hence, no incentive for them to reach out. The lender made the offer as soon as the borrower reached out. So, they are safe. There is no direction from the Reserve Bank in this regard. Therefore, the lenders can afford to wait for your request.

## What Is the Cost of Delay?

This is important. Since the onus is on you to reach out, any delay will have cost impact.

In this example, I will consider the impact of delay. If you reach out after 12 months, you will pay a higher rate of interest rate for the next 12 months and a lower rate after that. I have assumed that the loan interest rate and the EMI remains constant during this period.

• If you switch now, the loan outstanding at the end of 12 months will be Rs 64.94 lacs
• If you delay by 12 months, the loan outstanding at the end of 12 months will be Rs 65.31 lacs.

Because you continued to pay a higher interest rate for 12 months, your principal outstanding is higher by Rs 74,381. Despite this switch to a lower rate (after 12 months), you will take 2.27 more EMIs to close the loan. The cost goes up as you delay the switch.

 Time Period If switched right away If switch is delayed Cost of Delay O/S Principal EMIs Left O/S Principal EMIs Left Difference in Principal O/S Extra EMIs to be paid 6 months 64,94,189 134 65,31,142 135 36,953 1.16 12 months 62,99,618 128 63,74,000 130 74,381 2.27 24 months 58,89,194 116 60,39,780 120 1,50,586 4.30 36 months 54,48,663 104 56,77,100 110 2,28,438 6.12

As a borrower, you must keep an eye on the prevailing interest rates. If you see that the interest rates are down (or that the FD rates are going down), check with your bank. There is no harm in asking. All you have to do is call your bank or reach out to the relationship manager. That’s the first step. There is no guarantee that the bank will make you a good offer. You must still ask. If the offer is not good or you feel short-changed, you can reach out to another lender.