Is it Worth to Transfer Your Home Loan Balance to a Lower Interest Rate?

Home Loan

Servicing loans, especially home loans, at higher interest rates than what other lenders offer is not a viable financial decision. When interest rates in the economy fall, not all lenders reduce their rates on equal scales for different reasons. In such a scenario, it makes sense to switch to other lenders. It will enable you to save on the interest out-go by opting for the Home Loan Balance Transfer facility a.k.a refinancing your existing loan.

While delving deeper into this, let’s address the most elementary question when contemplating home loan transfer.

Mr Patel took a home loan at an interest rate of 9.25% and regularly paid his EMI’s. Recently, his friend got a home loan at a rate of 7%. What should he do to bridge the gap of 2.25 percentage points? Opt for the Home Loan Balance Transfer.

Balance Transfer is where an existing borrower can switch the outstanding loan amount to another bank, offering a lower interest rate. Apart from lower interest rates, revised repayment terms, and preapproved offers is the little bonus. Availing this new loan will include paperwork as well as additional costs.

Is transferring your loan now a good idea?

Homebuyers are spoilt with a wide range of freebies. For instance, real estate developers are hailing discounts, the government offered GST waivers and slashed stamp duty prices, whereas interest rates are already at historic lows ranging anywhere between 6.95% to 8.50%. Indeed, along with new home buyers, the existing borrowers with high-interest rate loans can seize the opportunity.

Why should one consider a Home Loan Balance Transfer?

-If paying a higher interest rate to the bank, who can offer a lower interest rate.

– If new loan offers are 50 basis points lower than the current loans.

-Bank refuses to reduce interest rate despite RBI decreasing the repo rate.

When should one get started?

After 12-18 months of paying the existing loan, avail of the home loan’s balance transfer.

How to avail of Home Loan Balance Transfer?

To transfer the home loan from one bank to another, you are required to:

Who can avail of the Home Loan Balance Transfer?

Any borrower with an existing loan and history of regular payments for 12 consecutive months or more can avail.

How can Home Loan Balance Transfer benefit?

Make a cost-benefit analysis for a  home loan balance transfer to be considered profitable while keeping the following factors in mind:

 

1. Lower interest rates and EMI: 

The most common reason for a home loan balance transfer is a lower interest rate. RBI regulates the repo rate, and a reduction in it might result in a lower interest rate.  For instance, if you opted for a home loan three years ago, you must have settled with an interest rate of more than 8.5 percent, and now most banks are offering loans as low as 6.9-7 percent.

If the new lender offers a low-interest rate, it can bring down your EMI as much as 5 percent every month, which is a significant sum for a 10-year loan.

2. Assess your credit rating:

Ensure to pay your EMI and bills regularly to maintain a healthy credit score. A perfect credit score of 750+ shows your creditworthiness for a balance transfer. A low credit score means less qualified for the balance transfer facility. The new lender will consider the credit score as one of the most crucial factors.

3. Balance Transfer charges:

Every time transferring a loan with a rate cut is an unfeasible option. There are strings attached like processing fee(nearly 1% of the loan amount), legal and admin fees and more. Analyze the cost carefully to evaluate whether it is lesser than your interest amount.  A cost-benefit analysis will help you to decide to settle for the lowest transfer costs and friendly terms.

4. Foreclosure and prepayment charges:

These are the two most important charges related to a home loan. RBI has notified banks not to charge foreclosure charges and prepayment penalties on floating rate home loans. Still, 2% will be levied on fixed-rate home loans. Therefore, it is an essential factor to consider while doing a cost-benefit analysis.

5. Repayment terms:

Ensure the repayment terms and conditions are better than the existing one as each lender has different guidelines. Look out for a lender that offers the best service to avoid unpleasant experiences.

6. Loan Tenure:

If the outstanding loan tenure is longer (say, 15 years or more),  switch loans as a large part of EMI comprises Interest in the initial years. A borrower should

consider balance transfer as he will be getting a loan cheaper by 25 bps than the existing one.

On the contrary, if you are nearing your loan tenure, it makes no sense to transfer the balance.

7. Outstanding Loan amount:

EMI comprises two parts -principal and Interest. If the loan matures and gradually the principal gets paid off, it, in turn, reduces the home loan amount.

A higher outstanding loan amount increases your chances of getting a better deal from the lender on your loan transfer.

8. Repo-linked loan:

Banks offer a repo rate-linked lending rate (RLLR) directly linked to the RBI’s repo rate. The interest rates will move in line (up/down) with the repo rate movements. In recent times, the RBI has reduced the repo rate, which positively impacted the homebuyers. It reduced the interest rate, and in turn, EMI went down.

9. Read the fine print:

There are more details in the fine print than what meets the eye. Ensure to read the terms and conditions before transfer thoroughly to discover any hidden charges, loan-to-value ratio, prepayment charges and more.

10. Better Top-up options:

Home loan transfer balances also increase the top-up loan amount received at low-interest rates and manageable EMI’s.

The following example will help illustrate this fundamental rationality for an individual opting for transfer:

RBI has significantly reduced the repo rates to 4% in the last few quarters,  followed by banks and the lender rate cuts. It has resulted in lower home loan interest rates.

Mr Rai has an existing loan with an outstanding amount of Rs.50 Lakh for a tenure of 20 years at an interest rate of 7.5%. Another lender offers at an interest rate of 7%. Will it be wise to opt for a Balance Transfer?

   
Loan Outstanding Rs. 50 lakhs
Original Interest Rate  7.5%
New Interest Rate 7.0%
Remaining Tenure 15 years
Original Interest Payable Rs.33.43 lakh
New Interest payable Rs.30.89 Lakh
Savings on Interest Rs. 2.54lakh

 

Source: Hindustan Times

  • To take advantage of the falling interest rate and lower the EMI, Mr Rai can switch over to another lender as the existing bank offers a high-interest rate. To bridge the gap of 0.5 percentage points, he should opt for a home loan balance transfer.
  • With a thorough cost-benefit analysis, Mr Rai should time the loan refinancing so that saving on interest payables is maximized.
  • Balance transfer is a lucrative function as the tenure is long, and the outstanding amount is high. Over the years, the interest component will go down, and the principal will come up.
  • Mr Rai should also consider all the additional costs like stamp duty, processing fee, and more of a balance transfer would be Rs.20,000-30,000. Stamp duty charges are levied state wise. Therefore, evaluate that the benefits outweigh the costs when computing the potential savings.

Is resetting a better option?

The new lender will consider you a new borrower and pass the benefits of reduced home loan rates and concessions on fees.  However, a balance transfer is a lengthy process with cumbersome documentation and high charges. Therefore, it is advisable to write to the existing lenders to amend the rates and negotiate the remaining balance terms. If the negotiation fails, apply for the balance transfer facility to take the maximum benefits.

The home loan balance transfer or refinancing is beneficial only when analyzing all the factors – lower EMI, home loan tenure, high credit score, outstanding loan amount, and transfer cost. Going by the adage, Every penny saved is every penny earned and money that you don’t pay is for the savings account. If you are still unsure, consult with our financial experts (absolutely free) to make the most crucial decision of your life, not to regret it later.