Home loan interest rate has plummeted by 2% since when the apex bank of India, i.e. the RBI, has mandated to link the rate of retail loans with external benchmarks like the repo rate (1). So, individuals who had taken a loan before the period may need to bear more interest outgo than individuals borrowing lately.
Nevertheless, borrowers having a home loan at a higher interest rate can reduce it by opting for changing their lending institution. A home loan balance transfer enables them to switch their existing loans to a different lending institution. However, before opting for this facility, borrowers need to be fully aware of why they should avail of these benefits.
Reasons for a home loan balance transfer
Here is why individuals should leverage this home loan balance transfer:
- Reducing the cost of borrowings
Individuals can curtail their interest outgo to a large extent by opting for this home loan balance transfer. However, they must consider transferring their loan account balance to a lender who agrees to provide a lower interest rate. Generally, in this big-ticket home loan, individuals stay in their debt for a long term. In fact, a paltry 0.5% interest rate reduction can save them a substantial amount of money.
For example, let’s assume that a person had taken a home loan of Rs.20,00,000 at an interest rate of 9% for a loan tenor of 15 years. He/she has repaid all dues for 84 months or 7 years. At this stage, he/she can save Rs.49,536 by switching the existing loan account to another lender providing only a 0.5% lesser interest rate.
Individuals can easily calculate how much they can save by leveraging a home loan calculator regarding balance transfer.
- Lowering instalment amounts
By changing loan accounts to different lenders, facilitating a lower interest rate, borrowers can lower their monthly instalment burden. As a result, they can comfortably pay off their EMIs for the rest of the loan tenor. This, in turn, will help them stay abstain from missing the rest of the instalments.
- Availing top-up loans
Individuals can get the additional benefits of top-up loans by home loan balance transfer. Several lending institutions extend this special benefit to their new customers coming from their competitors. Individuals need to check how much add-on credit advance they can obtain from the new financial institutions before opting for this loan balance transfer. As a result, they do not have to freshly apply for housing loan in addition to their existing ones for home renovations.
- Getting effective consumer services
Individuals stay in a long term commitment with their lending institutions in case of a housing loan. However, they may encounter improper and inactive customer support from their existing financial institutions during this time. For example, they may not get a proper resolution for their loan-related queries and grievances. In these circumstances, they may opt for this home loan balance transfer to obtain pro-active customer support from a new lender.
Now that you know the advantages of a home loan balance transfer, discover what you must consider before applying for this facility.
Factors to check while switching loan account
Following are the crucial aspects individuals must consider while applying for a home loan balance transfer to reduce their borrowing costs:
- Additional charges of new lenders
Individuals should have complete knowledge about all the service charges, such as processing costs, charges on foreclosures and pre-payment etc., levied by new lenders. A higher rate of additional charges can adversely impact the overall borrowing cost, making it less profitable for borrowers.
- Remaining interest component
In this balance transfer facility, individuals save their cost of borrowing through balance transfer only when there is a substantial interest component left in the outstanding amount. They pay off the maximum interest component in the first half, so, switching lenders in the second half of the loan tenor may not be profitable for individuals.
In this context, one should also remember that they are entitled to the home loan tax benefit only on the interest component of their EMIs. So, individuals should not expect that they will get a higher tax deduction by home loan balance transfer when their interest component is significantly lower.
Apart from these benefits, individuals also should check whether the new lender provides an additional feature of pre-approved offers. Most lenders in India extend this benefit to their financial products, such as loans against property and home loan, etc. By accepting these offers, individuals can experience a faster loan application process. Borrowers need to provide their credentials, such as names and contact details to check their pre-approved offers.
In conclusion, individuals can significantly get new benefits like reduced EMIs, lower interest outgo etc., by opting for a home loan balance transfer. This way, it helps reduce their financial obligations to a large extent. However, individuals must check how much interest outgo they will save by obtaining this facility before switching their lenders.
