With the falling interest rates for many months, home loans, like some other lending products, are witnessing historically low rates from lenders. Many banks and HFCs are currently offering interest rates beginning at as low as 6.75%-6.9% p.a. Thus, it’s natural for existing home loan borrowers to be contemplating the idea of going for a balance transfer to avail lower interest rates and/or better service terms. However, going ahead with this decision of switching your lender has to be well thought and prepared, along with the factoring of all the parameters that would influence this decision.
Explained here are four key factors to avoid ignoring while taking up the thought to avail home loan balance transfer:
Overall savings in interest cost
More often than not, the primary aim behind home loan balance transfer decisions is reducing the overall home loan interest payout on the outstanding home loan amount. Choosing to move forward with the balance transfer facility is especially beneficial for those set of existing home loan borrowers who had taken the loan earlier at relatively high-interest rates and have now become eligible for availing home loans at much lower interest rates due to their improved income and credit profile. The lower interest rate availed on exercising HLBT reduces the overall interest payout on existing home loans without impacting the liquidity and existing investments of borrowers.
However, before switching to another lender, keep in mind that your balance transfer request will be considered a new lender’s fresh home loan application. Therefore they may levy charges such as processing fees and administrative charges. This makes it crucial to calculate the overall savings in interest cost after factoring in such charges if any. Go ahead with the home loan balance transfer option only if the overall interest saving is substantial and significantly outweighs the costs involved.
Existing benchmark regime
1st October 2019 onwards, the RBI had mandated banks to link all new floating rate loans to an external benchmark. In the case of home loans, the external benchmark adopted by most banks has been the repo rate. When compared to older rate-setting regimes such as MCLR based regimes, external benchmarked loans involve the swifter and quicker transmission of policy rate changes. Hence, borrowers currently servicing their home loans on older rate regimes can compare the interest rates offered by other banks for balance transfer facilities. If the rates are significantly lower, thereby resulting in substantial savings, then such borrowers can go ahead with the HLBT option. As the transferred loan will be considered as a fresh loan by the new lender, it will be linked to the repo rate or other external benchmark regime adopted by the lender.
However, since external benchmark linked loans have to be reset at least once in three months, only those borrowers who are comfortable with frequent and swift changes in their loan rates, both upwards and downwards, should opt for loans linked to external benchmarks.
Whereas those having home loans with HFCs can scout for lower interest rates being offered by other lenders on the balance transfer option if their existing lender’s interest rate is significantly higher than theirs.
Scope of renegotiation with the existing lender
Before choosing a home loan balance transfer, try negotiating with your existing lender regarding the interest rate and/or service terms in case you are unsatisfied. If your existing bank or lender refuses to accept your request to negotiate and provide a lower interest rate and/or better terms of service, you can go ahead & switch your lender by opting for HLBT. You should keep in mind that when you apply for a balance transfer, the new lender will impose its own set of terms and conditions on the transferred loan. Before you finalize the new terms, you can also use this balance transfer facility as a new opportunity to either avail a larger loan amount in the form of top-up, if required, or reset your home loan tenure as per your requirement.
Residual loan tenure
It’s generally not advisable to opt for a home loan balance transfer during the later stages of your tenure, as borrowers must have paid the larger part of their interest component during the initial stages of the repayment tenure itself, hence implying the presence of a relatively lower scope of significant total interest cost savings during later repayment tenure stages.
However, at whatever tenure’s stage you are at, take into consideration these two crucial points. First and foremost, try keeping the repayment tenure upon opting for home loan balance transfer the same or even shorter if possible, vis-a-vis the remaining tenure of your existing home loan. Doing so will, in all likelihood, save you from the burden of incurring additional interest costs which you would have otherwise paid in case you had taken a higher tenure than the remaining one for the transferred home loan. Secondly, if you tend to go ahead with the wish to pull down your EMI burden along with balance transfer, then you may opt for higher tenure than the remaining one on your existing home loan. But remember that, since a longer repayment tenure implies outgo of a higher degree of total interest cost, try to make a prepayment, whether partial or full, of the home loan whenever you possess surplus funds.
Besides these above-mentioned points regarding balance transfer, remember that, since the request for home loan balance transfer is treated as a new loan application by the new lender, the borrower would thus, have to again go through all the steps which such processes involve, like that of property evaluation, loan evaluation, documentation and other processes associated with a new loan application. Since all these steps can involve significant time & effort for the borrowers, they should first try to renegotiate their ongoing housing loan’s interest rates with their existing lender before transferring their switching to another lender. Move forward with the decision to opt for a home loan lender switch only if the existing bank or lender refuses to match the home loan interest rates offered by the other lenders on outstanding housing loans.