As a borrower, you might be looking to shift your home loan from your current service provider to a more efficient or cost-effective one. In the financial services space such transactions are termed as Balance Transfer.
How this system plays out is that the new lending institution pays the current balance amount to the original lender and starts accepting Equated Monthly Installments (EMIs) from the borrower.
While considering making this transfer, you might look at offerings that offer a lower interest rate, longer tenures for repayment, a better deal on prepayment or a top up to meet your additional expenses.
Bank loans are now linked to the bank’s marginal cost of funds based lending rate (MCLR). Any loan taken before April 1, 2016, was based on the bank’s base rate. While considering transferring a loan to non-banking finance institutions (NBFC) or housing finance companies (HFCs), keep in mind that the rates are set on the cost of funding and market competition instead of MCLR.
It is definitely a better financial decision for you to opt for a lender that offers a lower interest rate. However, make sure that you evaluate the savings on the basis of the pending tenure, outstanding amount, required documentation, time for disbursement, and the cost of transfer.
Here are some important considerations before you decide to transfer your home loan to a new lender-
Loans linked to MCLR
If your current lender seeks a higher interest rate, it is a prudent decision to switch to a lender offering a better rate. You may have to incur a processing fee with the new lender, but the existing lender cannot ask for foreclosure or full repayment charge in case it’s an individual home loan. It is not mandatory for the new lender to ask you to purchase a home loan insurance cover plan.
For loans taken after April 1, 2016, the interest rate is reset after one year. Therefore, consider making the shift after the reset date. If the Reserve Bank of India (RBI) increases the repo rate, the MCLR will be affected.
Loans linked to the base rate
You can opt to continue on the base rate if the end of the loan term is not far. However, in any case, you can shift to an MCLR-linked loan with the same or a new lender. The process to transfer to an MCLR-linked borrowing is easy and requires a fee and minimal documentation. Ensure that you consider the risks associated with MCLR before you make the switch. If interest rates are falling, setting the MCLR reset date as quarterly or half-yearly may prove beneficial- provided that the bank allows this provision.
After considering all the benefits and disadvantages, you can make the financial decision that is right for you. To initiate a transfer, you will need to obtain a No Objection Certificate (NOC) and a statement on the outstanding amount. You can provide the new lender with the necessary documentation. You should ensure that all your property documents are transferred to the new lender after the original lender is paid back the outstanding.
Finally, it is highly recommended to conduct a thorough check on the new lender and review the terms and conditions before making the transfer. You can conduct a quick search online to check for testimonials or reviews from current customers. Before you take the leap, make sure you have exercised due diligence to ensure real savings from your loan transfer.
(By Rishi Anand, Chief Business Officer, Aadhar Housing Finance)