Mr. X took a Home Loan worth Rs.50 lakh at a floating interest rate of 10.5% per annum for lender A for a period of 20 years. The EMI amount will be Rs.49,919 and the total interest payout will be Rs.69,80, 559. After paying this EMIs diligently for 3 years, he hears that another bank or NBFC is offering a Home Loan Balance Transfer at a rate of only 9.5% per annum on the outstanding balance.
Balance amount to be transferred is Rs.47,40,280. Suppose lender A charges 1% of the total loan amount as foreclosure charges along with 0.25% processing fee and another Rs.2,500 miscellaneous charges. The total transfer charges come to Rs.1,754 which is borne by lender B. The new EMI Mr. X needs to pay is Rs.46,918, the difference being Rs.3,001. The net profit of Mr. X is Rs.5,50,450.
Home Loan borrowers who are paying a high interest rate can consider a Balance Transfer to a new lender who is offering a better rate of interest in order to pay a lower EMI and save on the total interest payout. Read on to know more.
What is a Home Loan Balance Transfer?
It’s the process of transferring the existing outstanding loan amount to a new lender, who ideally is offering a lower rate of interest and/or better terms and conditions.
Most lenders are offering an online home loan Balance Transfer these days and it’s an easy process that you can initiate from the comforts of your home.
Why Balance Transfer?
The primary reason why people opt for a balance transfer is for relatively higher interest rate and poor quality of services from existing lenders. When the Reserve Bank of India (RBI) changes rate, all the banks and NBFCs are supposed to follow suite. However, they don’t do so and even in case they cut the rates, the reduction is not as much as it’s supposed to be.
Lower interest rates are offered only to new customers to allure them. Some lenders to allow conversion to lower interest rates from existing higher one, but the conversion rate is very high and so people opt for Balance Transfer.
Poor services and denial for additional or top-up loans are some of the other reasons why people go for Balance Transfer.
Should you Transfer?
The most important factor that you need to consider is the saving you’ll make in terms of interest payment. Considering Mr. X, it’ll be beneficial to make the switch as he makes a profit of more than Rs.5 lakh.
If you’re considering a Home Loan Balance Transfer, then make sure to calculate the internal rate of return (IRR). Find out how much you need to pay as the transfer cost and what will be your actual saving in all these years. Remember, the initial transfer cost has to be paid immediately and the saving will be spread out throughout the year.
You need to make a cost-benefit analysis based on the outstanding loan amount, transfer cost, tenure, and the difference in the home loan interest rates. If the tenure is about to get over or if the remaining balance is not high, a balance transfer doesn’t make sense, as the cost involved will eliminate the benefits. Some of the factors you need to consider while planning a Home Loan Balance Transfer are:
Applicable Costs for Transfer
Make sure to consider the prepayment or foreclosure charges of your present lender, though this just in case of fixed rate Home Loans. Check with your existing lender about the prepayment penalty in case your loan is under a floating rate scheme.
Another big cost is the processing fee that typically ranges from 0.25-1% of the total loan amount. It can also be a flat fee. Inquire with your bank or NBFC and ask if there are other applicable charges. Some lenders charge an administrative charge and other miscellaneous charges. Keep all these in mind while calculating your net benefit.
Calculate Home Loan EMI with the new lending rate and calculate the saving you’ll make as well. Compare the benefits of this reduced interest rate keeping in mind all the other charges before taking the final decision.
Terms and Conditions
Make sure that the slashed interest rate being offered by the new lender is just not a promotional offer and is here to stay. Many banks and NBFCs offer a teaser rate in order to attract customers. In this case, the relatively lower interest rate stays for a limited period of time and adjusts after that period. So make sure to know what your rate of interest will be and how it will change.
What do you Need to do?
Make sure to go through the loan documents offered by your new lender in order to avoid trouble in the future. Also before switching, you can consider asking your present lender whether he will reduce the existing rate or not and if yes, what will be the conversion cost.
Talk to the new lender and use your credit score to bargain. Make sure to get the best deal. Also look for a lender who offers you a Top-up Loan on your Home Loan Balance Transfer, at minimal interest rates.
Most banks and NBFCs offer an online Balance Transfer these days but a hasty decision can result in choosing the wrong lender and paying a heavy price. Call the lender or check its website and go through the terms and conditions properly before taking the final call.