If you’re planning to do a Home Loan balance transfer, here are a few factors you should bear in mind before you arrive at a decision.
A Home Loan can certainly make your dream of buying a house easier but it involves taking on a financial commitment that will last for at least 15 years. Staying in debt for that long can be stressful for some and so they opt for foreclosure of their Home Loan.
The RBI in a mandate dated 2012, lifted foreclosure charges on Home Loans with a floating rate of interest. For those Home Loans with a fixed rate of interest, banks continue to charge around 2%-4% on the outstanding principal. With Home Loans, borrowers are often caught in a dilemma of whether they should focus on saving the interest they pay to banks or save taxes that they have to pay the government. Many borrowers think of switching to another lender to get better interest rates on their loans and thus lower their EMIs.
How Does Balance Transfer Work?
Once the borrower submits the application with his existing lender requesting a balance transfer and the new lender approves the takeover of his Home Loan, the new lender pays the outstanding amount to the existing lender.
After the existing lender receives the pending amount, it releases the property documents and also issues a no-due certificate to the borrower. These documents are handed over to the new financier and once this process is complete, the borrower has to pay all the remaining future EMIs to the new lender as per their interest rate norms.
Additional Reading: Top 5 Reasons For Home Loan Rejection
As sound as the idea might seem, switching to another lender demands careful thinking. Here are a few factors to consider before you make up your mind about a balance transfer:
Lower EMIs And Interest Rates:
Most borrowers opt for a Home Loan balance transfer in order to switch to lower interest rates and thereby, lower their EMIs. Switching to a lender that offers you lower interest rates will help to reduce your EMI burden considerably.
Better Terms Of Repayment:
Every lender attaches a host of terms and conditions as well as pre-payment facilities that may offer a better deal than the one you’re currently getting. Understand these provisions carefully and work out to see if, by balance transfer, you’re indeed getting a better deal.
Additional Reading: The Dos And Don’ts For Home Loan Prepayment
Top up Loans:
While some of the direct benefits of a balance transfer are lower interest, lower EMIs, and better repayment terms that directly reflect the decreased loan cost, lenders also offer a host of indirect benefits if you transfer your Home Loan to them like a top-up loan. A top-up loan provides you with an additional loan amount in case your currently sanctioned loan amount does not suffice.
You can avail a top-up loan at a competitive rate and use it to pay off your immediate debts or even use it for home renovation. Your existing lender may not offer this top-up loan even when there is an increase in the real estate price/market value of your home. Your new lender will definitely consider the current market value of your property as the benchmark and may offer a top-up loan.
Additional Reading: What Has Credit Score Got To Do With Home Loans?
Most lenders these days offer the option of a Home Loan balance transfer and it might make more sense in the initial years of repayment as you can get the benefit of lower interest rate for a longer period. Remember that in addition to choosing the lowest Home Loan interest rate, ensure that the agreement allows prepayment, foreclosure and switching to another lender with no penalties. Arrive at a decision based on the quantum of loan sanctioned (vis-à-vis another lender), documentation formalities and the estimated time for the actual disbursement.
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