It has been a great year for new homeowners. Banks and housing finance corporations have reduced home loan interest rates to historical lows. Currently, the prevailing home loan interest rates start from a nominal 6.75% to 6.9% per year.
To benefit from these reduced home loan interest rates, several existing home loan borrowers are contemplating transferring their home loan balance to a new lender. While this may seem like a great idea to reduce the overall home loan burden, switching home loan borrowers needs to be a well-thought-out decision. You have to consider several factors to ensure that the home loan balance transfer offers you significant savings and other benefits.
In this guide, we walk you through the factors to consider before switching your ongoing home loan from one borrower to another.
#1: Check if it’s possible to transfer your Home Loan to Another Lender
Before you begin your research on home loan balance transfer, make sure to go through the terms and conditions of your current home loan. Some lenders do not allow home loan balance transfers. If this is the case, it doesn’t make sense to research home loan balance transfer options.
Instead, you can work on negotiating home loan interest rates with your current lender. Check if there is any possibility for them to lower your ongoing interest rates.
#2: Calculate the Overall Cost of Home Loan Transfer
A home loan balance transfer’s primary objective is to reduce the overall interest costs on the outstanding home loan amount. A balance transfer is handy for home loan borrowers who availed a home loan at a high fixed interest rate. By transferring your ongoing loan to a new lender, you can benefit from reduced interest rates on the outstanding balance.
A home loan balance transfer helps you to reduce the overall loan burden. You have two options to choose from during a balance transfer:
- Reduce the remaining tenure by keeping the EMI the same or even increase it.
- Alternatively, you can reduce your monthly burden by lowering the EMI.
Simply put, home loan EMIs help you lower your existing home loan balance. However, what you have to remember is that switching your home loan to a new lender is treated as a new home loan application. This means you have to go through the whole home loan process again 8 Mistakes you Avoid When Buying Flats in Mumbai. In involves:
- Submitting a new application – gathering all the required documentation, etc.
- Credit checks by the new lender to see if you’re eligible and determine your loan’s interest.
- Paying processing fees and other charges, etc.
Thus, you need to calculate all the fees included to see if the switch is indeed worth it.
Home Loan Balance Transfer Tips: Don’t be tempted to switch your home loan to a new lender just because of the lower interest rates offered. Instead, calculate all the costs involved – the processing fee applicable at the new lender, the balance transfer fee to be paid to the old lender, reduction in interest rates to see if the balance transfer gives you significant savings.
#3: Decide if it’s the Right Time to Transfer your Home Loan
Generally speaking, transferring a home during the later stages of repayment is not advised. This is because by then, you would have paid off the majority part of the interest component. If you’re looking for maximum interest savings, you need to transfer the loan during the first few years of repayment.
Let’s explain this with an example. Let’s say you have an ongoing home loan with a balance of Rs. 50 lakhs. The current interest rate on it is 8.5%, and the remaining tenure stands at 20 years. Your new lender offers you interest rates of 7.25% for the same loan. When you transfer your loan, you can enjoy a savings of nearly Rs. 9.29 lakhs over the course of the loan.
Now, let’s assume that you transfer the loan when the remaining tenure is 5 years. In this case, the overall savings comes down to just Rs. 1.79 lakhs. As you can see, the savings are not significant in the latter stages of the loan, especially when you factor in the costs involved like home loan transfer charges at the old lender, processing fees at the new lender, etc.
Home Loan Balance Transfer Tips: Irrespective of when you transfer a home loan, keep the remaining tenure the same or reduce it. Opting for a longer-term home loan transfer increases the interest component, which in turn diminishes any savings you get out of the move. Go for a longer tenure, ONLY if you’re trying to reduce your EMI burden. Even if you go for a longer-term, try to reduce the overall loan burden by prepaying any surplus funds you get.
#4: Understand the Terms and Conditions of the New Loan
It’s easy to get tempted by a low-interest rate offered by a lender. However, you need to carefully scrutinise the terms and conditions of the new loan before accepting it. Read the fine print carefully. See if there are any hidden charges, foreclosure penalties, etc.
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Don’t base your decision solely on the interest rates. Consider all the factors involved – check the lender’s credibility, ease of transfer, miscellaneous charges, etc., to decide if the home loan balance transfer is beneficial for you in the long run.
#5: Finally, Don’t Forget to Check Your Credit Score
When you opt to transfer your home loan to a new lender, the lender will process your application like a fresh loan application. This involves credit checks by the lender. The balance transfer approval will depend on your credit score and history. Suppose your credit score is low, then the lender will not approve the balance transfer.
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So, before you evaluate lenders, make sure to check your latest credit score for free. Your credit score will indicate whether you’re eligible for a balance transfer and the interest rates. If your credit score is low, try to improve it to become eligible for the best home loan transfer rates.
Wrapping Up
A home loan balance transfer is an excellent way to reduce your ongoing home loan interest rates. However, switching your loan without considering all the implications is not the best move. Make sure to consider the five factors mentioned here before switching your ongoing home loan to a new lender. Evaluate the pros and cons of the action to decide if it’s worth it.
Also, check if there’s any scope of negotiation with your current lender. If yes, negotiate with your current lender to reduce your interest rates by showing proof of higher income or an improved credit score.
