Once you've purchased a house on home loan, you will then have several years to repay the amount, which will also include the interest charged on the home loan. One possible way of tackling high interest rates is switching to new lender that's offering better rates. This is known as balance transfer and it includes two aspects:

1. Processing fee

2. Prepayment Penalty

A new lender usually charges up to 50% as processing fee on the total loan amount to take over the loan. And your current bank will usually charge up to 2% on the outstanding loan amount as a prepayment penalty. Given these penalty charges is it worth switching lenders? While banks do offer a lower rate of interest to new customers as against existing ones, will it be beneficial given the twin slaps of prepayment penalty charged by your current bank and the processing fee charged by the new one? Let's find out with the help of an example:

Suppose you took a home loan at 8.5% interest in 2004 from Bank X. Since then the bank increased has the interest rate to 14%. However, another consumer applied to same bank (X) for a home loan and was offered one at an interest rate of 12%. You now have the option of switching to a new bank if you're offered a similarly low rate of interest by them. In a nutshell, it makes sense to switch to a new lender only if you're offered an interest rebate of at least 2%. However, there're a few more points that you need to keep in mind before trying to make the switch:

Approach Several Banks

Approach as many banks as possible and see which one offers you the lowest rate of interest and charges the lowest processing fee. Moreover, you'll need to inform your current bank about your decision to transfer the loan.

Negotiate

Your current bank will insist for a round of negotiations before allowing you to make the switch. This will be a good time to transfer let them know why you're discontent with their present terms and conditions. There's a chance that they may reduce your interest rates and you won't have to make the switch.

Transfer

However, if that doesn't happen your lender will offer you an NOC for switching to a new lender. The certificate will mention details like the total loan amount and the prepayment charge. Once you have received the NOC you can approach a new bank for a loan transfer. In order to successfully transfer the home loan to a new bank and please make sure to keep all original documents pertaining to loan transfer.