Home loan balance transfer offers could be tempting. They look to be cost effective prima facie and you may be offered several other benefits like EMI holiday, gift vouchers, so on and so forth. But is there anything you are likely to miss out in the entire process? Let’s talk about some of such significant points that may impact your financial health in the long term.
First of all, it is preferable to continue with the current lender until their rate of interest touches a level where the differential amount as compared to the rate offered by the other bank offering balance transfer goes considerably high. A difference of 5-20 basis points (bps) should not be the reason to transfer the home loan.
However, if the rate of interest offered by the other bank is greater than 25 bps, then you should swing into action, but that should not be the only factor to ground your decision. Apart from the rate of interest, you should also check on some other aspects.
This, for instance, includes charges such as processing fee and other administrative and documentation fees. The new bank may charge you anywhere from 0.25-1 per cent of the outstanding loan amount or a flat fee as applicable on the borrower. Considering that home loan amounts run into several lakhs, this amount could be substantial.
Additionally, paperwork for the new lender has to be done similar to what was carried out before. The new lender would also be responsible for technical and legal assessment which would also need to be paid for. Also, administration fee may have to be paid as well. These steps have to be worth the effort put in to find a new lender.
Switching from fixed rate to floating or vice versa
Yes, this can be done if you decide to go for balance transfer. In case the home loan was taken at a fixed interest rate and you are not happy with the performance, then a balance transfer can be initiated at a floating rate.
At the same time, also factor in how much of the repayment of the loan amount has taken place. If a major portion of the loan has been paid off, there is no point in opting for the balance transfer. What is to be remembered is that if the loan is linked to a floating rate, banks do not charge a pre-payment penalty. The same may not the case with fixed rate of interest.
Check on penalty clause
Your current bank may have applied penal charges clause in case of balance transfer. Do check your home loan agreement on this point. The charges may be higher in the initial years and may go down with time.
So, make sure that the penalty is worth the benefits that accrue from transferring the home loan. Think thoroughly and be clear with the options before deciding and signing on the dotted lines.
Is it mandatory to buy life insurance with home loan?
It is a general practice that banks offer additional financial products like life insurance along with home loan balance transfer. Most times, executives may even end up saying that it is a mandatory requirement, but that is not true. It is all up to you to opt for any additional products with home loan.
So, when should you consider balance transfer?
Looking at the considerable costs and procedural requirements, it does not make much of a difference to opt for a balance transfer if the difference in the interest rate between your bank and the prospective bank is equal or less than 25 bps.
However, if the difference goes beyond this threshold, then you could consider balance transfer taking all the aforementioned factors into account.
On 01 April 2016, the RBI had mandated banks to follow Marginal Cost-based Lending Rate (MCLR) for setting up their interest rates regime. The MCLR system is much more transparent and efficient as the changes in the policy rates are transmitted to borrowers quickly.
The Non-Banking Finance Corporations (NBFCs) and Housing Finance Corporations (HFCs) although still follow the old Prime Lending Rate (PLR) based system and that can be yet another reason for you to opt for balance transfer from an NBFC or a HFC to a bank.
Last but not the least, your existing bank may offer you the rates at par with the other banks when they see you going, and that would be the best deal as you will save all the charges and the time and energy needed to get the balance transfer done.
(By Amit Prakash Singh, Principal Partner, Square Capital)