The primary reason behind most home loan balance transfer decisions is the reduction in overall interest payout on the outstanding home loan amount.
Despite three consecutive repo rate cuts of 25 bps each this year, prior to the recent rate cut of 35 bps announced by the RBI, many home loan borrowers might still be waiting for reduction in their home loan rates. This is primarily due to the provision of loan reset dates, which refers to the date at which the loan’s interest rate gets reset based on the MCLR prevailing on that date. This often causes a significant difference in the interest rates being charged to existing and fresh home loan borrowers, often leading the former to scout for home loan balance transfer.
Before you go ahead, let us discuss the various situations that make home loan balance transfer a beneficial move:
# Switching to MCLR regime
Many home loan borrowers who had availed their loan before April 1st 2016 would still be servicing their home loan based on older rate regimes. Such borrowers should consider switching to the MCLR regime, as it offers better transmission of policy rate’s benefits and higher degree of transparency than the older regime. The presence of pre-set loan reset dates in the MCLR regime helps in ensuring that the changes in lending rate during the interim period get transmitted to the borrower once the loan’s reset date arrives, depending upon the existing rate on that date. Therefore, either consider requesting your existing lender for a switch from the older regime to MCLR based regime, or else, opt for home loan transfer to another lender who is offering lower interest rates based on MCLR.
# Substantial savings in overall interest cost
The primary reason behind most home loan balance transfer decisions is the reduction in overall interest payout on the outstanding home loan amount. But before switching to another lender who is offering lower interest rate, remember that whenever you request for a balance transfer, the new lender considers this as a fresh home loan application, and therefore may levy charges such as processing fee and administrative charges. Always factor in these charges while calculating the overall savings you will make on balance transfer. Make sure you go ahead with the balance transfer only if the overall interest saving is substantial and outweighs the costs involved, if any. If it does not outweigh, then continue with your existing home loan lender and try to negotiate for a lower interest rate.
# Reset for better loan terms and conditions
While serving their home loan, borrowers might consider opting for home loan balance transfer in case the existing lender denies their request to re-negotiate interest rate, reset period, loan tenure or provide better service terms. In such cases of unsatisfactory services rendered by the existing lender, borrowers can switch to another lender offering better service terms. However, keep in mind that the new lender would impose its own set of terms and conditions upon your transferred home loan. So, before finalizing the new set of service terms with the lender, you can consider using this balance transfer as a new opportunity to either revise your loan tenure, or avail a bigger loan amount by opting for the combined facility of balance transfer and top up, if available and required.
# Top up loan requirement not met
Home loan borrowers often require additional funds while serving their home loans, in order to fulfil varying monetary needs like home renovation, child’s higher education, vacation abroad etc. For such requirements, instead of availing high cost loans, the existing home loan borrowers should consider requesting their existing lender to grant a top up home loan, whose interest rates usually start at as low as 8.55% p.a. But sometimes, such top up loan requirements are not met, may be because the lender does not provide top facility, the top up request is rejected or the top up amount sanctioned by the existing lender isn’t suffice. In such cases, the existing home loan borrower may consider opting for balance transfer and switch to another lender who offers and fulfils the required top up loan amount.
(By Ratan Chaudhary, Head of Home Loans, Paisabazaar.com)