Can a Home Loan Balance Transfer Benefit You?

The festive season is here! It’s time for a new beginning, shopping and celebrations. Almost on a cue, on September 29, RBI Governor Raghuram Rajan announced rate cuts, which prompted few banks to follow suit and lower their lending rates. This is expected to add cheer to the home loan market and move the almost stagnant realty sector and attract new buyers.

However, Mr. Mehta, a customer, is not buoyed by this entire rate cut euphoria; he already has a home loan, which is at a higher rate and there is no way he can benefit from these lower rates. Really? His friend suggested him that he should explore the option of ‘home loan balance transfer’ to take advantage of the lower rate regime.

What is home loan balance transfer?

Home loan balance transfer is an option that allows you to benefit from a downward movement in lending rates. Lending rates often change with the market condition. Often in floating rate home loans also, the lender may not lower the interest for the customer or may not reduce it enough even when new loans are available at lower rates.

When one opts for a home loan balance transfer, the entire unpaid principal amount of the loan is transferred from the existing bank to a new bank. Obviously, the new bank will charge a lower interest rate; the bank taking up the loan pays the balance principal amount due to the bank, which originally extended the loan. The customer subsequently pays the EMIs to the new bank at the new rate.

Can a home loan transfer benefit you?

This is a crucial question. However, there is no clear yes or no answer to this. A home loan transfer can benefit you only in certain conditions. Even if a bank offers lower interest rate it may not be an economically viable option to transfer a home loan if the savings are not enough to justify the time, effort and cost. Following factors contribute to the decision making when considering whether to transfer a home loan or not; they are:

1. Total Cost
2. Remaining Loan Tenure
3. Outstanding Principal
4. Time and Effort

In case you are wondering that is there actually a cost involved in making a home loan balance transfer? Yes there is! When you transfer a home loan the cost involved includes the processing fees (charged by the bank taking over the loan), pre-payment penalty (may or may not be charged by the existing lender) and some charges like stamp duty, etc. While pre-payment penalty is generally waived off by most of the banks as NHB and RBI discourage banks from charging it but other charges are unavoidable. Total savings can be determined after considering the total cost involved.

Remaining loan tenure is also a crucial factor; if there is less time left in completion of the loan tenure then it might not be worth making the effort for a home loan transfer. If the remaining loan duration is long, the cost will be amortized over the remaining loan duration else the cost burden will not be justified. Again a bigger principal amount outstanding makes more sense when transferring a home loan because a bigger unpaid amount translates into more savings. Consider this example:

Rohan has an outstanding loan amount of Rs 20 lakh @ 10% and remaining loan tenure of 15 years. If he switches to a loan at 9% interest rate, his yearly savings would be Rs. 14,484 and total savings Rs.217, 260.

Dhruv also has a loan @ 10%, with 15 more years remaining, his unpaid principal amount is 25, 00,000. If he switches to a loan at 9% his yearly savings would be 18,336 and total savings for 15 years Rs. 275,040.

Thus it is obvious that a bigger outstanding principal justifies the cost more due as the total savings are more. Do keep in mind that loan transfer like a new home loan involves time and effort which obviously cannot be measured in monetary terms. You will have to research which bank to transfer the loan to, liaison with your bank and the new bank, submit applications, get documentation in place etc.

But before your transfer your loan, be careful. Before approaching another bank, check with your existing bank if they are willing to reset the rate. If the market conditions warrant, most banks would be willing to retain their customers and re-negotiate the loan rate. Even if the new rate offered by your existing bank is not as low as what the competitor is offering, it makes more sense as it involves no processing fee, no pre-payment charges, no running around.

(Image Credits: Indiatimes)

(About the author: Rajiv Raj is the Director and Co-Founder of www.creditvidya.com)