Sachin had taken a fixed rate home loan of Rs 40 lakhs in December 2013, with 20-year tenure at 10.5 per cent p.a. Although the bank has progressively reduced its home loan rates since, he has not benefited from it as he had opted for fixed interest rate. His requests for converting the loan to floating-rate were declined by his lender. Finally, he decided to transfer his home loan to a new lender, at lower rate of interest.
Falling interest rate has been prompting many borrowers to opt for home loan balance transfer, like Sachin. However, lower interest rate should not be the only criteria for initiating the transfer of your home loan. There are other scenarios that work in favour of home loan balance transfer. Let’s look at what home loan balance transfer entails:
When to opt for home loan transfer
Lower interest payouts: Reduced interest payout due to lower interest rates is the primary driver behind the decision. However, remember that the earlier you transfer your loan, the more will be your savings. Opt for home loan transfer if the savings generated is large enough to leave you with sizeable amounts for further investment apart from covering the cost of transferring the loan.
Poor service from existing lender: Poor service from your existing lender can also be a valid reason for you to transfer your home loan. Opt for it if your existing lender does not extend special offers or privileges (even after consistently repaying your outstanding balance) or refuses to bring the interest rates at par with the ones offered to new lenders.
Non-approval of top-up loans: Consider switching your loan if your existing lender does not allow you to avail top-up loan. Banks and NBFCs may offer such loans to existing borrowers in case they need funds over and above the existing home loan amount. These are quite similar to personal loans in the sense that lenders don’t monitor the final use of loan proceeds and hence, you may use it for home renovation, buying consumer durable or even for meeting emergency expenses. The interest rates on top-up loans are usually lower than the ones charged on personal loans.
Renegotiation of terms and condition: As transferring your home loan is similar to availing a fresh loan, you can negotiate with the new lender for changing some terms and conditions. You can opt for increasing your loan tenure to reduce your EMI or for decreasing it if you are comfortable with paying higher EMIs. However, remember that increasing your loan tenure will increase your interest payout.
Freeing up collaterals: As you must have already paid a substantial amount of your existing home loan, your collateral for the new lender should be based on the outstanding amount. This will allow you to free up some of the collaterals. You can then use the freed up collaterals take new loans for your business or other uses.
When not to opt for home loan transfer
If fees and charges are high: As the new lender will treat your home loan balance transfer as a new loan application, the new lender will charge various fees and charges, such as processing fees, conversion fee and administrative charges. Calculate these charges and compare them with the amount saved on reduced interest payout. If the savings is not substantial, continue with your existing lender.
If existing loan is in its last leg: Transferring your loan at the end of its tenure will not make much sense as the reduction in interest payout will be balanced out by the efforts and costs incurred while transferring the home loan.
Opt for home loan balance transfer only if the benefits outstrip the costs and efforts involved by a significant margin. Have a frank conversation with your current lender about your intention to transfer the loan. If your current lender agrees to reduce the rates and the resultant savings is more or less equal to the savings from loan transfer, consider continuing with your current lender.
The author is CEO & Co-founder, Paisabazaar.com