When Can a Home Loan Balance Transfer Be the Best Choice?

September 15, 2021 Mutual Fund

Home loan is a long-term commitment, generally ranging from 8 years to 30 years. But, it does not mean that you have to continue your home loan with the same bank or housing finance company you chose initially. Yes, it is feasible to transfer your existing loan to another lender if they are offering a lower rate of interest or other benefits, or for some reason you are not satisfied with your lender.

What is Home Loan Balance Transfer?

Home Loan Balance Transfer is shifting your outstanding Home Loan to a different lender for a better rate of interest. Technically, when you transfer your home loan to another lender, the new lender pays off the unpaid loan balance to your existing lender, and your existing home loan account gets closed. Simultaneously, your new home loan account starts with your new lender, where you pay a comparatively lower rate of interest.

Nowadays, many banks and housing finance companies offer the facility of Home Loan Balance Transfer with several offers and benefits. More and more lenders are interested in offering pre-approved Home Loan Balance Transfer to the consumers with excellent credit scores. Although all these promotions and offers are targeted to turn the borrower towards them instantly, the borrower needs to check whether it is a win-win situation for both the parties and the terms are stable.

What is the process of Home Loan Balance Transfer?

1. Do your research and finalise the lender by comparing the rate of interest, cost involved, and product features.

2. You may even try to negotiate the rate of interest with your existing lender to avoid the hassle of transferring the loan and processing fees.

3. If you decide to do a Balance Transfer, apply to the new bank or housing finance company that you have chosen.

4. Request your existing lender for a No Objection Certificate (NOC).

5. Submit all the required documents along with NOC to the new lender.

6. Your existing home loan account will be closed once the new lender pays off the outstanding loan amount.

7. On completion of the balance transfer process, your new Home Loan starts with the new lender at a lower rate of interest.

Why should you opt for a Home Loan Balance Transfer?

While taking Home Loan you might have done enough research and thought that your lender is offering the best rate of interest in the market. We completely agree that your lender might have offered you the best possible interest rate when you had initially applied for the loan. However, there are chances that at present, someone else is offering a better rate of interest along with other benefits that may match your requirements.

The home loan interest rate ranges anywhere from 6.50% p.a. to 12% p.a., which is on a higher side compared to the rest of the world. Moreover, the amount of home loans are generally very high. Hence, even a slightly lower rate of interest can make a huge difference in the total amount you pay.

When should you opt for a Home Loan Balance Transfer?

Many people think that the home loan should be transferred immediately if another bank or housing finance company offers a lower rate of interest. However, many factors should be taken into consideration before you transfer your home loan balance. A borrower has to do a cost-benefit analysis to get an idea of how much exactly he/she will save if the existing loan is being transferred to a new lender. Read on to know, when does it make sense to do a Home Loan Balance Transfer.

1. Lower rate of interest:

The lower rate of interest is the most common reason for transferring a home loan. If another bank or housing finance company offers a lower interest rate than your existing lender, it should definitely be considered. Even a tiny difference of 0.5% p.a. in interest rate makes a difference in the overall amount you pay. Moreover, it helps to bring down the monthly burden of EMIs.

Suppose you have an outstanding home loan of Rs 60 Lakhs with ABC Bank. The rate of interest is 9.75% p.a., and the remaining term is 20 years.

Case 1: If you decide to continue with the existing lender, your expenses will be:

Case 2: If you opt for a Home Loan Balance Transfer with XYZ Bank, which is offering a 1.50% lower interest rate than your existing lender, i.e. 8.25%, your expenses will be:

Thus, reducing the rate of interest by just 1.50% can save Rs 13,88,898.

2. Cost of balance transfer:

Many people assume that the interest rate is the only cost involved in home loan that needs to be considered while doing the balance transfer. However, there are many costs involved that need equal attention while making a long-term commitment of Home Loan Balance Transfer. A Balance Transfer is as good as availing of a new loan that carries a processing fee and other charges. Therefore, make sure to do a cost-benefit analysis. In simple words, the benefits you get should be more than the cost involved in the process.

So, if by switching the lender, you can save Rs 2 Lakhs on the interest, whereas the processing fee you have to pay is Rs 2.30 Lakhs. There is no point in switching as it will turn out to be an additional expense for you.

3. Longer loan tenure:

Consider a Home Loan Balance Transfer when you still have a longer loan tenure left. The longer loan tenure ensures you save the maximum amount with a reduced rate of interest. It does not make any sense to transfer a loan when you are approaching the end of the loan tenure. Although you might save some interest by shifting your home loan that has only a couple of years of loan tenure left, you might end up paying extra money on the cost of transferring your loan.

4. Higher outstanding amount:

While transferring the loan, you need to make sure that the outstanding amount is higher. It is not advisable to switch your loan when only a small portion of your debt is unpaid. The outstanding amount and the money you will save should be worth the time and effort it takes for researching the best lender and transferring the loan.

5. Better product offerings:

All the home loans offered by banks and housing finance companies will have their unique features. If you are not satisfied or require some specific features that your existing lender does not offer, it is advisable to switch your loan to another lender. However, while transferring your outstanding loan, make sure the lender offers the features you require as well as it is financially beneficial to you.

For example, if your existing lender has higher charges for pre-payment and foreclosure of a home loan, you can consider Home Loan Balance Transfer to the lender who does not charge or has minimum charges for pre-payment and foreclosure along with a lower rate of interest.

6. Top-up loan:

Another significant benefit of Home Loan Balance Transfer is that while transferring the loan, the borrower can get an additional amount with their existing loan. This additional amount is called a Top-up Loan facility. A top-up loan is generally limited to 25% of the outstanding amount that you are transferring. It can be availed at a lower rate of interest and used for any personal purpose, such as home renovation, child’s education, etc.

For example, Ms Sudha wants to make Home Loan Balance Transfer of Rs 20 Lakhs. And, she also needs Rs 4 Lakhs to buy new furniture at home. With a top-up facility that comes with Home Loan Balance Transfer, it is easy for her to avail of the extra loan at a lower interest rate. But, without a top-up facility, Ms Sudha might have to avail of a Personal Loan that has a significantly higher rate of interest.

7. Change the type of interest rate:

A home loan can be availed at a fixed or floating interest rate. A fixed interest rate remains constant throughout the loan tenure. Whereas a floating interest rate changes with the change in Repo Rate. With Home Loan Balance Transfer, a borrower can change the type of interest rate he/she is paying.

If you are paying a fixed interest rate on your home loan and the possibility of home loan interest rates decreasing is more, it is advisable to switch to a floating interest rate. On the contrary, if you are paying a floating interest rate and the possibility of interest rates increasing continuously is more, it is advisable to switch to a fixed interest rate. While switching from a fixed interest rate to a floating interest rate and vice versa, a balance transfer should be considered to get the benefit of lower rate of interest.

8. Better customer service:

Since the duration of a home loan is usually longer, most people prefer good customer service. There can be many issues you might face after availing of a loan, such as no prompt service at a service desk, not updating personal details even after a long follow-up, frequent changes in the terms and conditions, etc. So, if you are not satisfied with the services of your existing lender, you can switch to another lender with whom your requirements match. However, while shifting to a different lender, make sure you check all the other factors as well.

To conclude:

Home Loan Balance Transfer is the best way to get the benefit of a lower rate of interest and other benefits stated above. While you may avail of a Balance Transfer for any reason, it is advisable to check the terms and conditions of the new lender and compare the financial benefits before applying for it. You need to make an informed decision because, just like a Home Loan, a Home Loan Balance Transfer is also a long-term commitment.

This article first appeared on PersonalFN here