Things to know before a home loan balance transfer

When banks cut interest rates, it is a perfect time for homeowners to review their monthly cash outflow and ease their financial stress.

When used correctly, refinancing a loan can be a great choice, but an incorrect balance transfer can lead you to a stage where you might never pay off your debt.

What is Home Loan Balance Transfer?

A home loan balance transfer is the process of transferring an outstanding home loan from one lender to another. This is typically done to take advantage of a lower interest rate or better terms offered by the new lender. When a home loan balance transfer is done, the outstanding balance of the home loan is transferred to the new lender, and the borrower begins making payments to the new lender instead of the original lender.

It works by taking out a new loan to replace your existing loan. It helps you change your loan terms by changing tenure, Interest rate, or loan amount.

Why should you refinance your loan?

There are many reasons why people decide to refinance a home loan, but not all of these make sense for people who want to reduce their debt burden.

1. To reduce rate

The primary reason is saving money; when you refinance to a lower rate, you reduce your monthly payment and reduce the total amount of interest you pay over the life of the loan.

For Eg. For a 25 lakh home loan @8% and nine-year remaining, your monthly EMI is 32547. If you stay with the same rate for the whole tenure of the loan, you will pay 1015055 in interest, and if you refinance the loan @7% keeping the other factors the same, you will reduce your EMI to 31266 and your total interest paid to 876694 saving 138361 and if you invest this 1500 saved per month in a SIP @8%, you will get close to 2.37 lakhs at the end of 9 Years.

2. Change to a fixed rate or a floating rate

When you go for a balance transfer, you can change your rate type, the benefits of switching rate type

Floating to Fixed

When Interest rates are low, someone who has a floating rate may want to lock in a lower fixed rate for the remaining tenure.

Fixed to Floating

Floating rates are often lower than fixed rates; someone who wants to have a loan for a shorter period should consider their loan at a floating rate as it can save you money in the short term till the rates go up.

3. Change of Tenure

You may use refinance to pick a shorter loan term and pay off the loan faster or opt to increase the loan term, which can decrease your monthly loan payment but stretch the amount you need to pay off your loan.

4. Home Equity/Top Up

For most people in India, their home is their biggest asset. When they face financial challenges or need low-cost funds, they turn to equity in their home.

When you refinance your loan, you can increase the Top-up amount to the property’s market value.

It can be tricky as we know people who take these top-up loans to fund non-essential expenditure and end up paying with their EMIs for life.

If your goal is financial independence, you should avoid this option. 

While refinancing to a lower rate can be helpful to reduce your debt burden, it is crucial to consider the fees the lenders charge to refinance.

They charge processing and admin fees, which offset the money saved by lowering the rate. When comparing the options available, you will have to crunch the numbers and compare the cost against the savings.

Homeowners can either go for a balance transfer or negotiate with current bankers. It is essential to compare the two options in terms of cost savings. 

There are some advantages to negotiating with the current lender.

 1)Your relationship with them can make the process quicker as the documents required would be fewer.

2)The fees might be less than paying for a balance transfer to other banks, especially if they want to keep you as a customer.

3)The penalty for exiting a lock-in can be substantial if you go for a balance transfer, and you should not close your loan within the lock-in period.

This lock-in period, usually twelve months for most banks, is when one has to pay pre-closure charges to close his loan in full.

But this will not always be the best choice, especially if the current banker is not offering you competitive interest rates and not reducing the fees; you should look for other options.

For example, with a 700,0000 loan for 25 years carrying an interest rate of 8.55 per cent, EMI 56602 with 17 years remaining and principal outstanding being 6077592, the total interest payable in 17 years is 5469206.

If you request your current banker to reduce the rate, you might get it reduced to 7.35 per cent, the total interest payable drops to 4584215.

But If another bank is willing to offer an even lower interest rate of 6.5 per cent, the total interest gets further reduced to 3978921, and you can save a total of 1490285 in interest paid and 7305 in monthly payments. 

For example, IT professional Ashish Singh,39, bought his first home in 2015 and since then switched to lower rates twice, saving him lakhs of rupees.

The goal is to achieve your financial independence faster; you should never let your relationship with an existing bank make you suffer financial loss. The lender who doesn’t offer you the best rate is not worth your relationship.

How to refinance your loan?

It is a simple process, but selecting a lender and submitting the required documents can be time-consuming.

The general steps to follow to ease out the processing

1. Select the reason you want to refinance. 

Do you want to take advantage of the lower rates? Or you are planning to raise funds from your Home Equity.

When you finalize the exact reason, you will assess your options well.

2. Check your credit score 

Before starting the process, you should verify your credit report, as it is crucial to know whether everything reported on the credit bureau site is correct and you are not in for surprises. There are many sites where you can pull your credit report for free. Check it for errors and put a query if any doubt or correction is required.

3. Research Lenders

There is n number of places where you can look for home loans ranging from Banks to NBFCs. Another option is to work with a Home Loan broker; they are intermediaries that help borrowers find the right lender for the loan and may help facilitate the loan processing.

4. Compare rates and fees

All Lenders don’t offer the same interest rate and fee; therefore, you should get quotes from multiple lenders to select the best deal.

5. Choose your lender

Once you have selected the lender which offers you the best rate and fees, you can complete the process by submitting the documents.

This whole refinancing can take up to 30 days to complete, and once done, the new bank will pay off your old loan, and you can start paying your new EMI.

Home loan transfer can help you lower your EMI and pay less interest on the total amount but making sure you get the best rate and not pay high fees does require a lot of research.

Ensure that the decision you make brings you close to your Financial Independence.