Many home loan borrowers wonder how much they could have saved if their existing home loan had a lower interest rate. After getting a home loan to purchase their dream house, many borrowers find that they are spending too much on their home loan than others. Considering the high-interest rate and extended term of a home loan, even a .5% drop in the interest rate may result in considerable savings. Therefore, thinking about home loan balance transfer makes sense in this scenario. Here is a complete guide that can help make an informed decision and get the maximum benefit.
What are Home Loan Balance Transfers?
A balance transfer, also known as loan refinancing, means transferring a home loan’s balance amount to a new lender. Borrowers often transfer their existing loan to a new lender if they get a lower interest rate or better loan conditions with them.
When Does Balance Transfer Make Sense?
Below are a few situations when a balance transfer is an advisable option:
1. When a significant part of the loan tenure is remaining
A balance transfer is the most profitable when the loan term is in its initial years. Transferring the loan by the loan term-end does not make much sense, as it won’t lead to significant savings for the borrower.
2. When a significant amount of loan amount is unpaid
A balance transfer makes good sense if a substantial amount from the home loan is still outstanding and the borrower gets a lower interest rate with the new lender. However, if the borrower has already paid most of the loan amount, transferring the loan would be useless.
3. Reduced Loan Cost
A lower interest rate is not the only thing to consider while transferring a loan. A home loan balance transfer incurs significant expenses the borrower has to bear. These include prepayment charges to the existing lender, documentation and processing charges for the new loan, etc. A borrower must consider a loan transfer only if the benefits are more significant than the costs.
Benefits of Transferring a Home Loan
Those who apply for home loan transfer get several benefits, including the following:
Reduced Interest Rate: The most significant reason borrowers transfer their home loans is the reduced interest rates offered by other lenders. Transferring a loan to get a reduced interest rate saves cost on EMIs and interest outgo, thereby reducing the overall loan cost.
Adjusted Loan Tenure: As the borrower’s financial condition changes, they may want to adjust their loan tenure according to their repayment capacity. For instance, if their salary has increased, they may choose a shorter loan tenure with bigger EMIs to pay off the loan sooner and become debt-free.
Prepayment Facility: While transferring a home loan to a new lender, the borrower may prepay a part of the loan to reduce the loan amount without any prepayment charges. As a result, they minimise their loan burden and save on the loan cost through loan transfer.
Top-Up Loan: Getting a top-up loan on the existing home loan is feasible while transferring it to a new lender. A top-up loan proves to be a lucrative option if the borrower needs additional funds to repay the loan or fund other expenses.
Improved Credit Score: As the borrower reduces the interest rate and adjusts the loan tenure according to their repayment capacity, the EMI payments become more manageable. As a result, the borrowers improve their credit score with regular EMI payments and boost their eligibility.
Understand the Loan Transfer Process
Here is a stepwise procedure to transfer a home loan:
- Compare lenders based on their interest rates, costs, and features.
- Talk to the existing lender and negotiate the loan terms to get a better deal on the current loan.
- After deciding to transfer the loan, request a NOC from the existing lender containing the loan details.
- Collect the property papers from the current lender and transfer them to the new lender. Don’t forget to get any post-dated cheques with the lender.
- Submit the required documents to the new lender.
- Repay the existing home loan and close the account. The new lender will pay the loan balance and collect it from the borrower in EMIs.
- Start with a fresh loan with reduced interest rates and better terms and conditions.
A home loan balance transfer is a beneficial option for borrowers who want to reduce their interest rates and get better terms on their existing home loans. It helps save a considerable amount and makes the loan easily manageable for the borrowers in many ways, as mentioned above.