Opting for a home loan balance transfer during the later stages of the loan tenure would not be of much use. Home loan borrowers pay most of their interest component during the earlier stages of the loan tenure, thereby leaving little scope for making interest cost savings through loan transfers during the later stages
The ongoing low-interest rate regime has led many banks and housing finance companies to offer home loan interest rates starting as low as 6.65% per annum.
With such lucrative rates on offer, existing borrowers servicing home loans at much higher interest rates may contemplate transferring their existing loans to other lenders offering lower rates and/or better terms of service. Such borrowers must take the following factors into account before opting for the home loan balance transfer option.
Calculate savings in the overall interest cost: The primary reason for opting for a home loan balance transfer is to reduce the overall interest cost of the loan, especially those availed at a much higher interest rate, without impacting one’s liquidity and/or existing investments. The transfer option is especially beneficial for existing borrowers who have become eligible for availing of home loans at lower rates due to their improved credit profile.
Ratan Chaudhary, head of home loans, Paisabazaar.com, said, “Since home loan balance transfer requests are treated as fresh home loan applications by lenders, they levy processing fee, administrative charges and other charges associated with new applications. Thus, those contemplating to opt for a transfer should calculate their overall savings in interest cost after factoring in the charges to be incurred while transferring the home loan. Opt for the balance transfer option only if the overall savings in interest cost is significant enough after factoring in the cost involved in doing so."
Existing borrowers opting for home loan balance transfer can consider a home loan overdraft option if offered by the new lender. Under this option, an overdraft account in the form of a savings or current account is opened and linked with the new home loan account. Borrowers can deposit surplus funds in this overdraft account and withdraw from it, if required. The balance maintained in the overdraft account is then deducted from the outstanding loan amount for calculating the interest of the loan. This reduces the interest cost.
Residual tenure of the existing home loan: Opting for a home loan balance transfer during the later stages of the loan tenure would not be of much use. Home loan borrowers pay most of their interest component during the earlier stages of the loan tenure, thereby leaving little scope for making interest cost savings through loan transfers during the later stages.
Chaudhary said, “Borrowers should also try to keep the repayment tenure of their new home loan post balance transfer the same as the remaining tenure of their existing home loan as opting for a longer repayment tenure would result in higher interest cost. Only those seeking to significantly reduce their EMI burden should opt for a longer tenure for the new loan."
Renegotiating interest rates with existing lenders: As a home loan balance transfer is considered a fresh loan application by the new lender, the borrower has to undergo the steps and processes associated with a new application, including loan evaluation, property evaluation, etc. Since all these steps can involve significant time and effort for borrowers, they should first try to renegotiate the ongoing home loan’s interest rate with the existing lender before switching. They should go ahead with the transfer option only if the existing lender refuses to match the rates offered by other lenders on their outstanding home loan.