3 Important Home Loan Terms Before You Switch!

Updated on November 30, 20183 mins read

While you seek to switch your loan, here are 3 home loan terms you must be well aware of before you take the leap. These are:

  1. Tenure Reduction
  2. EMI reduction
  3. Top up loan

Let us see what each of these mean and why they are important for your switching decision.

 

1.       Reduction in tenure of home loan:

A reduction in tenure means that after switching to a lower interest rate, EMI remains the same but your loan tenure reduces. This allows you to repay your loan faster. The savings in this case is a simple multiplication of your EMI and the reduction in tenure. So, with an EMI of Rs 30,000 and a tenure reduction of 10 months, the gross savings are Rs 3,00,000.

 

2.       Reduction in EMI of home loan:

 A reduction in EMI means that after switching to a lower interest rate, your loan tenure will remain the same but there is reduction in the EMI. This will allow you extra disposable income every month. The savings in this case is a simple multiplication of EMI saved every month and the total remaining tenure. So, if the EMI is reduced by Rs 1,000 and remaining tenure is 15 years, the gross saving is Rs 1,80,000.

So which one of these two options is better? Let’s find out using the SwitchMe calculator:

Let us take the example of our customer; Mr. Sahu, who works as a regional sales manager in an MNC.

Case of Mr. Sahu

On using our balance transfer calculator; he was presented with the 2 options of saving; tenure reduction and EMI reduction. This is what he found:

SwitchMe savings indicator

2 options of saving

Taking SBI as an example, let us understand these 2 options in detail (approx values):

Analysis of saving options

graphical analysis of ways of saving

He learned that by reducing the loan tenure he could save as much as Rs.20.97 lakhs!  This evidently makes tenure reduction a better option.

 

3. Top-up loan:

 A top-up loan means an additional loan, which is offered on an existing home loan. The loan amount depends on your property value and outstanding home loan amount.

For example, you have a home loan of 55 lakhs, of which you have paid off 10 lakhs, leaving you with an outstanding principle 45 lakhs. Now you wish to take a top-up loan to sponsor higher education for your child. So in this case; you are eligible for a top-up of 10 lakhs. However, if you have switched your home loan to another bank, your property gets re-valued, making you eligible for a higher/lower top up loan amount. The degree of change in value may differ from case to case.

Top-up loans are useful as no inquiries are made about their end usage and are available at a lower interest rate compared to personal loans. But no tax benefits are given on a top-up loan.

 

Practices of banks with regards to top up loans:

  1. Some banks will take an undertaking that the top up loan amount will not be used for speculation. 
  2. They may give the top up loan at a rate of interest higher than the home loan interest rate.
  3. They may treat the top up loan as a separate account, in which case you will  have to pay a pre-payment penalty, if you switch your home loan.

Therefore, while switching your home loan, you can choose either of the options of reducing your loan tenure or reducing your EMI and then take a top up loan if you wish.

Begin your switching process now by using our balance transfer calculator below!


Tarini

Tarini

Tarini comes with a degree in Mass Communication and Media studies. She joined SwitchME as a content writer and moved on to being an assistant product manager. Tarini is an experienced Content Strategist with a background in Product development and management. She is skilled in SEO, social media strategy and online content marketing and likes to travel when possible
3 COMMENTS

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  1. How to Close a Home Loan? | SwitchMe Blog
    Mar 25 2014 at 4:40 pm
    Reply

    […] if you have taken a top up loan on your home loan, you will have to pay a prepayment penalty, regardless of fixed/floating interest […]

  2. Satish Vijaykumar (@bombaylives)
    Jul 22 2013 at 2:29 pm
    Reply

    Another option is to visit the Bank and ask if they have any offers on reducing the PLR rates, You can pay 5k-20k to reduce the interest rates by 1-2% and save lakhs.

    They do not announce or promote it, you need to visit the branch once in a while, do some part principal payments.

    I did that twice on my home loan with ICICI bank.

    cheers,

    • admin
      admin
      Jul 22 2013 at 3:52 pm

      Satish,

      This indeed is an option and included in our calculator. If you were to state the current bank in the inputs, the saving and the cost as applicable for a switch within the bank is also given. Typically we see that the charges for switching within the bank are higher than switching to another bank. The interest rate is usually lower with other banks. The only savings in case of switching within the bank is on the stamp duty.

      Do try out our calculator for your own bank also. You would get a pretty accurate picture of all your options.

      We see both patterns in our customer base: customers switching to a new bank and customers switching within the bank. Currently, the first category is a lot more than the second.