If you took a Home Loan a few years ago, you might probably be frustrated by the fact that you are paying so much more interest as compared to the rates today. At times like this, you would probably try to find a way to reduce the interest rate and EMI (Equated Monthly Instalment) that you are currently paying. The best option for you at times like this is to opt for a Home Loan Balance Transfer.
A Home Loan Balance Transfer is when you shift your Home Loan from one bank to another. The new bank would pay the outstanding loan amount to the bank with whom you had initially taken the credit. You then have to continue re-paying the EMI to the new bank for the remaining unpaid principal. A Home Loan Balance Transfer Offers a new EMI usually set at the lower interest rate that is currently the trend in the market as compared to the rate of interest that you were paying initially.
The Best Time to choose Home Loan Balance Transfer
There are many different aspects that you would have to take into consideration if you are thinking about transferring your Home Loan. Ideally, you should only choose to move the balance of your Home Loan only if doing so is beneficial to you. The interest rates for home loans are continually fluctuating. If the loan that you have taken were before April 1st, 2016 it would be linked to a base rate that is usually unresponsive to cuts in prices. If you are paying an interest rate that is more than 10 to 12% you should look into more recent interest rates and find a Home Loan Balance Transfer that is best suited for you. Along with the new interest rates you also have to consider the processing fees that banks or non-banking financial companies (NBFCs) would charge you to transfer your loan.
Before applying for the transfer, however, you need to ensure that it is the right time for you to opt for a Home Loan Balance Transfer. Here are a few points that you have to take into consideration before you make your decision.
- The transfer cost:choosing to transfer your current Home Loan to a new lender can be a life-changing decision. Although there may be a lower interest rate for the loan, there are also other costs that you would have to consider. Most institutes would charge you a processing fee on the balance of the loan that you have transferred. There are also administrative fees, prepayment penalties in the case of fixed loan rates, stamp duty, and other kinds of legal charges. If the cost of all of these additional fees is significantly lower than the amount you would be saving on the interest, then it makes sense for you to transfer your Home Loan.
- Tenure remaining: at times when you are in the final few years of your loan it is best if you stay with the same lender and pay out the entire loan with them. At this point, if you choose to transfer the balance of your Home Loan, you may be at a loss. Although the overall interest rate of the Home Loan with the new bank or institute is lower, you would be spending a lot more on other fees.
- Long-term saving: this is when you would have to first do all of the math and figure out exactly how much you would be saving in the long run with the new interest rates. If you think that this amount is significant, you can choose to transfer your loan, however, if it does not seem substantial enough to you it is best to stay with the current service provider that you have.
- Before you find a Home Loan Balance Transfer, you would need to carry out a few calculations about your existing loan.
Let us look at a few examples for you to understand this concept better.
You have taken a Home Loan of Rs. 25 Lakhs for a total period of 20 years. Your interest at that time was 10.5% per annum, so your current EMI is Rs. 24,959. However, the present interest rate is 9.5% per annum, and you want to transfer the loan to a new institute that offers the lower rate of interest.
If you took the loan in 2013 your outstanding amount after five years would be Rs. 22,63,120. Assuming a transfer cost of approximately Rs. 25,000 and a new EMI of Rs. 23,632, you would be saving a total of Rs. 1,327 each month on your EMI. The total tenure left is 15 years so at this time with the new EMI you would be saving Rs. 2,38,860. After you subtract the transfer fees, you are saving Rs. 2,13,860.
In this scenario assume that you had taken your Home Loan in 2001 after 17 years of paying the loan your outstanding balance amounts to only Rs. 7,86,009. Assuming the transfer cost is Rs. 15,000 your proposed EMI would be Rs. 25,178 which is Rs. 219 more than you are currently paying. Adding that up for the remaining 3 years your total loss would amount to Rs. 7,884 without the transfer fee and Rs. 22,884 with it.
Comparing both scenarios, it is clear that it only makes sense to opt for Home Loan Balance Transfer in the first case. In conclusion, you should only transfer your Home Loan if you are saving a significant amount of money in the long run.
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