Home Loan Balance Transfer: When should you opt for it?

Here are some of the situations when the existing home loan borrowers should exercise the home loan balance transfer option.

Home Loan Balance Transfer: When should you opt for it?
Existing home loan borrowers considering the balance transfer option should ensure that both the loan tenure of the transferred home loan and the residual tenure of the original home loan are the same.

Existing home loan borrowers can exercise the Home Loan Balance Transfer option to shift their ongoing home loans to other banks/housing finance companies (HFCs). Under this facility, the new lender repays the outstanding principal amount of their ongoing home loan to the existing lender and in turn sanctions a new home loan to the borrower. The borrower has to then repay the home loan based on the new interest rate, loan tenure, processing fees and other expenses, etc. as decided by the new lender.

Here are some of the situations when the existing home loan borrowers should exercise the home loan balance transfer option:

They are eligible for home loans at lower interest rates from other lenders

Home loan interest rates offered by banks and HFCs differ widely based on the credit profile of individual borrowers. Lenders also factor in their own cost of funds and other financial/market based parameters while setting the interest rates of home loan borrowers. The transmission of policy rate changes to existing home loan borrowers can also vary depending on the interest rate regimes used for their respective home loans. Hence, home loan borrowers should opt for balance transfer if other lenders are offering them home loans at much lower interest rates.

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Improved credit profile makes existing borrowers eligible for lower interest rates
 
Lenders add the spread and credit risk premium (CRP) to their underlying benchmark rate when setting the interest rate for home loan borrowers. Both the spread and CRP components are usually decided based on the borrower’s overall credit profile. Home loan borrowers with better credit profiles are usually charged a lower spread or CRP and vice versa.  
 
“Some of the main aspects of an applicant’s credit profile used to fix the spread/CRP include their credit score, monthly income, occupation profile and employer’s profile (for salaried applicants). Hence, existing home loan borrowers who were charged higher CRP/spread during the initial loan sanction and have undergone major improvement in their credit profile since then can consider the balance transfer option for their home loan. They might be eligible for lower home loan interest rates because of their improved credit profile,” informs Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
 
Existing lender is not sanctioning top-up on the ongoing home loan or charging higher interest rates for it

Banks and HFCs provide top-up home loans for their existing home loan borrowers provided they have repaid a pre-determined number of EMIs and have a satisfactory repayment history. Home loan borrowers can use the top-up facility for all purposes except for speculation. Lenders usually charge lower interest rates for top-up loans compared to other options like personal loans, loan against securities, etc. Many lenders offer top-up home loans to home loan borrowers exercising the balance transfer option. Thus, existing home loan borrowers who are not able to avail the top-up facility on their home loan from a lender or those who are being charged higher interest rates can opt for the home loan balance transfer and simultaneously avail the top-up loan from the new lender.
 
Points to consider while exercising the home loan balance transfer option
 
* Balance transfer leads to substantial savings in overall interest cost
 
New lenders consider an existing home loan borrower’s request for balance transfer as a fresh home loan application. Thus, existing home loan borrowers wishing to transfer their home loans to other lenders may have to incur processing fees, administrative fees and other charges levied during any fresh home loan application. “The new lender will also conduct its own documentation and approval process while processing the home loan balance transfer application. Thus, the existing home loan borrowers should select the balance transfer option only if it leads to significant savings in interest cost after accounting for the associated costs and efforts involved,” says Chaudhary.

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* Balance Transfer leads to higher savings during the initial stages
 
Home loan EMIs are a sum of principal and interest repayment components. The proportion of interest component in a home loan EMI is higher during the initial years of the loan tenure. As the tenure progresses, the proportion of principal amount in the EMI becomes higher. Thus, exercising the balance transfer option during the initial stages of the home loan tenure derives greater benefits in terms of interest cost savings for the borrower. 
 
* Ensure that the new loan tenure is same as the residual tenure

Existing home loan borrowers considering the balance transfer option should ensure that both the loan tenure of the transferred home loan and the residual tenure of the original home loan are the same. Opting for longer home loan tenures will increase the overall interest costs for borrowers, which defeats the primary reason for transferring home loans, i.e. reducing total interest cost. Thus, the existing borrowers should select a longer home loan tenure only if they wish to reduce their EMI burden.
 

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