Home loan balance transfer refers to the transferring of an outstanding home loan balance from one financial institution to another, for a lower interest rate or a higher tenure. At a time when home loan interest rates are hovering around nine per cent since RBI increased the repo rate to 2.5 per cent between May 2022 and February 2023 and maintained the status quo, would it be a good idea to go for a home loan balance transfer? Let’s find out:
“Consider a home loan balance transfer only if the all-inclusive savings from the lowered interest rate exceed the expenses involved in the balance transfer.
Before applying for a balance transfer option, borrowers should first try and negotiate with their existing lender for a lower interest rate if they have a good payment record and credit history. Remember that a new lender would treat the application as a fresh loan which would involve rounds of credit checks and documentation process,” says Atul Monga - CEO & co-founder, BASIC Home Loan.
Opting for a home loan balance transfer can be beneficial if the new lender is offering substantially better loan terms. However, borrowers must carefully evaluate the total cost involved such as processing fees, transfer fees, and even any existing prepayment penalties.
Says Amar Ranu, head, investment products & insights, Anand Rathi Shares and Stock Brokers: “Borrowers need to ensure the new lender offers a lower interest rate that offsets balance transfer fees like processing and prepayment charges. The new loan's terms, including penalties and fees, need to be checked. Consider the balance transfer switching only if the rate is at least 35-45 basis points lower.”
“Additionally, there are mortgage creation or franking charges of about 0.5 per cent. Eligibility for bank transfers requires at least six paid EMIs, a current account, and an agreement from all applicants to provide the necessary documents. The incoming lender will check the CIBIL report and set the interest rate based on both borrowers. Thorough research is essential before deciding to switch lenders,” adds Ranu.
According to experts, as RBI has kept the repo rate unchanged, there hasn’t been any significant change in the base interest rates. “Nevertheless, opting for a home loan balance transfer can be a smart move to get better deals on your existing loan. If one has a very good credit history, they can negotiate a lower interest rate based on their current credit score. Also, balance transfer gives an option to explore financial institutions that can provide a better experience, convenience, and other value-added services compared to the existing lender,” adds Rahul Kalyani, senior vice president, partnerships, LoanTap.
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Before opting for a home loan balance transfer option, borrowers must carefully evaluate the total cost involved including processing fees, transfer fees, and even any existing prepayment penalties. If the all-inclusive savings from the lowered interest rate end up exceeding these expenses, a home loan balance transfer can turn out to be beneficial.
“Also, one must consider the tenure of the remaining loan amount, as chances of potential savings are higher with an extended tenure. Home loan transfers aren’t always too beneficial for those who are in the later stage of the loan tenure, considering by then they would have already serviced most of the interest component of the loan,” says Monga.
Borrowers must also keep in mind that home loan balance transfers are treated as fresh applications by the lender and involve credit score checks and additional charges such as processing fees, legal fees, etc. A home loan balance transfer can turn out to be beneficial for a borrower. However, before taking the plunge, one must engage in thorough research and due diligence and then make an informed choice.
“You must also compare the interest rates offered by other lenders, and the fees charged by them, such as part-prepayment or foreclosure fees, etc., to make the transfer beneficial. Lastly, it is also crucial to read the terms and conditions properly so you fully understand what you’re getting into,” adds Kalyani.
