The No-Nonsense Guide on Home Loan Balance Transfer

With banks slashing home loan rates at the drop of a hat currently, home loan balance transfer or loan refinancing is emerging to be a popular trend. And, why not! It is a win-win for both existing home loan customers and banks — you get to refinance your existing loan at a lower rate and banks find a new customer in you. But, as always, it’s important to know what you are getting into than repenting later. Which is why, our No-Nonsense Guide on Home Loan Balance Transfer is a ready-reckoner for all of you planning to transfer your home loan.

We have, here, decoded the reasons why you should opt for a loan transfer, factors you must consider before jumping the boat and how to prepare for the loan refinance.

Why to go for home loan balance transfer?

• Offers reduced rate of interest:
  The most common reason for changing home loan issuer is the offer of a lower rate of interest of home loan that converts EMIs, in true paisabazaar.com style, into LMIs (lowest monthly installments). LMIs translate into savings, which means you optimize your EMIs to help you save more. Consider this: refinancing your home loan at 0.5% less than the original rate of interest can reduce your repayment tenure by 1.5 years on a 20-year repayment plan.
• Enables renegotiation of loan Terms and Conditions (T&C):
  There are times when you want to incorporate some changes in your T&C. In such a scenario, a loan transfer is very helpful. People want to change the terms and conditions of their current loan in order to increase the loan tenure and reduce their EMI. So, opting for a loan transfer gives you an upper hand as you can renegotiate the T&C and reach an agreement that benefits you.
• Offers better services than your current lender:
  You may find the services offered by your current bank are not up to the desired levels. This, for many borrowers, especially high net-worth individuals (HNIs), acts as a deal-breaker. You can use your leverage as a customer to get better services from the bank you wish to transfer your loan to.
• Allows you to increase loan amount:
  A loan top-up is an additional loan that you seek over and above the home loan you have already taken. It comes in handy for such purposes as renovation or furnishing of your home, buying a new parking space, and more. In many cases, you may find that the current lender is unwilling to top-up your existing home loan, even though the value of your property has appreciated since the time you undertook a loan. In such scenarios, a loan refinance can help as the new lender will consider the current market value of your property and not the old one.

Scenario

Suppose you opt for a home loan of Rs. 35 lakhs with a 20 year term at 10%, then you would be paying a monthly EMI of around Rs. 34,000. If 5 years down the line, you decide to transfer the balance loan amount of approximately Rs. 30 Lakhs and get an interest rate of 9.55%, then, your EMI would drop down around Rs. 32,000. By the end of your loan tenure, you will be able the save an estimated Rs. 1.47 Lakhs by having transferred your home loan to a lender charging a lower interest rate.

Table 1. Table providing data of EMI and savings on a home loan subsequent to a HLBT*

Initial Loan	Old EMI (@10%)	New EMI after HLBT of Rs. 30 Lakhs for 18 years (@9.55%)	Total Savings on Balance Transfer of Rs. 30 Lakhs
35 Lakhs (20 years tenure)	Rs. 34,000	Rs. 32,000	Rs. 1.47 Lakhs

*The figures in the above table are indicative and may vary based on various market factors and RBI regulations.

What to consider while transferring home loan:

The idea of converting your EMI into LMI by switching your home loan is certainly attractive and sensible, but you still need to tread cautiously. Just because the rate of interest is lower than what you are paying currently, does not necessarily make loan transfer the best option. To know what is best for you, it is important to consider the following factors:

• Time spent
  Calculate how much time has elapsed since your home loan repayment started. If your repayment tenure is nearing its end and the difference in interest rate is marginal, it’s better to avoid a loan balance transfer. Ideally, refinancing your loan is most advantageous during the early years of a home loan as at that time your EMIs are paying off your interest amount and not the principal amount.
• Teaser loan rate
  Banks often introduce teaser home loan rates in order to attract more customers. However, these rates remain low for just 3-6 months and increase substantially later. As a result, the benefits of loan transfer would reduce considerably, leaving in you pretty much the same spot as before.
• Processing fees
  Transferring your home loan also invites processing fee from the new lender. This fee can range from 0.5% to 1% of the loan amount applied for.

Keep in mind even though you may be offered a lower interest rate resulting in lower EMI, you may end up paying a higher interest amount than before. Therefore, before opting for a loan transfer, calculate the total amount you will be contributing at the end of your loan tenure under both the scenarios. Evaluate the interest amount you are paying/will pay in both the cases. Transfer your loan only if you feel there is a substantial saving to be made.

Documents under the scanner

Once you have decided to go for a home loan balance transfer, it is important that you prepare your application file. The application process of a home loan transfer is the same as the one adopted for new home loan. The new lender will check your credit rating and history, property value and your current home loan repayment record. And once they are convinced, your loan will be sanctioned.