Balance Transfer: Examining the Right Time and Other Factors to Consider
The demand for home loans is expected to be significant, with the future prospects of growth remaining strong.
- The predicted growth rate in this sector between 2021 and 2026 stands at 22%.
Affordable interest rates, along with urbanisation increasing at a steady pace, are expected to drive this growth in the coming years. In the past few months, the housing loan interest rates have fallen to an all-time low, benefitting not only new borrowers but also the existing ones.
With a home loan transfer, individuals with existing housing credit can further avail lower rates on their outstanding principal amount. Nevertheless, one must first understand the basic principles of such a credit transfer to know when it is most profitable to opt for one.
What is a home loan balance transfer?
Existing home loan borrowers carry an option to switch their outstanding loan principal from their current lender to a new lending institution.
In such a case, the new lender pays the pre-requisite amount to one’s current lending institution, effectively clearing all dues. The borrower continues to pay EMIs for the home loan but to this new lender and not the old one.
The primary benefit of a home loan transfer is that it allows a borrower to pay interest at a lower rate when compared to his/her previous lender. This check on interest outgo can either result in reduced loan tenure or decreased EMIs.
If one can undertake such transfers at the opportune time, the option can lead to sizable financial savings. However, before choosing a home loan balance transfer, one must consider a few key factors to ensure profitability from such a move.
Factors to consider before opting for home loan refinance
- Check the scale of EMI reduction
Home loan borrowers, mostly salaried individuals, often face a challenge in meeting the monthly liabilities when servicing such credit. Still, most housing loan borrowers in India are salaried.
- 88% of the home loan borrowers in 2020 comprised salaried individuals.
Thus, if you are opting for a home loan balance transfer, you should consider whether the new EMI amount represents a significant reduction from the previous figure.
A minor reduction may not be worth undertaking the hassle of such a refinance. Using a home loan balance transfer calculator, one can easily determine the total amount of savings, along with a decrease in EMIs.
- Check whether your home loan interest is charged as per RLLR or MCLR
Interest rates on home loans in India are linked to an external benchmark, generally either MCLR (marginal cost of funds based lending rate) or RLLR (repo linked lending rate). Those with MCLR home loans often do not receive the best interest rates due to a lack of transparency in reflecting any mandated rate changes.
The Reserve Bank of India, on the other hand, adjusts the repo rate from time to time, which can often lower the rates, typically RLLR, offered by financial institutions to home loan borrowers.
- Since February 2020, RBI has slashed repo rate by 115 basis points (100 basis points = 1%).
- This repo rate cut has translated into interest rate reductions ranging between 70 and 90 basis points for most home loan providers.
If your existing lender follows the MCLR benchmark, shifting to an RLLR-based home loan refinancing option may be more beneficial since you would be able to take advantage of adjusted rates.
- Consider the remaining tenure for your home loan repayment
Considering the remaining tenure is crucial when pondering over home loan transfer. To pick the correct time to undertake such a step, one needs to possess significant insight into the amortization schedule of such loans.
EMI for any credit is composed of two aspects, namely principal and interest components. Every month, a portion of home loan EMI goes toward servicing the principal outstanding, while the remaining is assigned to the interest accrued.
During the initial years of your home loan repayment, the interest component forms the majority of your EMIs, while the principal portion is limited.
Thus, early on in the tenure would be an ideal time to undertake a home loan transfer, making it considerably beneficial in terms of the total interest payment as per the applicable rate.
For instance, if you are just four or five years through your repayment tenure of 20 years, refinancing can lead to hefty benefits. However, balance transfer would not be profitable if you undertake it after 15 years of repayment for a loan of similar tenure.
- Additional charges for a balance transfer
Borrowers should know that balance transfer basically means closing one loan account and opening another with a different lender. Therefore, they need to bear the processing fees, foreclosure charges, and other costs to refinance.
If such costs are more substantial than the savings you stand to make after initiating a home loan transfer, you should reconsider your decision.
- Top-up loan facilities
Borrowers planning to refinance their existing home loans also need to know about top up loan on home loan. These are additional credits offered by the new lender to individuals who choose to refinance the existing home loans with them.
Top-up advances are available over and above the transfer value and come with no end-use restriction.
Reputed financial institutions extend attractive top-up advance offers to home loan balance transfer borrowers. Such advances are high-value credits amounting up to Rs.50 lakh.
Some lenders also provide pre-approved offers to simplify the loan availing process and help save time. These offers are available on several financial products, such as home loans and loans against property. You can check your pre-approved offer by submitting only your name and contact details.
Now that you know everything about home loan balance transfer, it should ease the process while ensuring maximum benefits from the facility. Make sure to check the additional eligibility of a new lender, if any, before you apply to experience a hassle-free transfer of your existing home loan outstanding.
Read Also: Home loan rates fall to below 7%. Five tips on how to reduce your EMI burden