Often homeowners take loans to buy houses, with the term usually ranging from 10 to 25 years. You may have taken a home loan a few years back when the loan interest regime was different.
Today, home loan interest rates may vary due to various aspects. If the current rates are higher, you have an advantage.
However, if the rates are lower or another lender offers a loan at a lesser rate, what can you do to take advantage of lower rates? Opt for a balance transfer.
What Is the Balance Transfer Of A Home Loan?
Balance transfer of a home loan, also known as refinancing, is an option to transfer your loan from an existing lender to another lender. Borrowers opt for a home loan balance transfer to benefit from lower home rates or better repayment terms.
A loan balance transfer is like taking a new loan, except it is only for the outstanding loan portion.
The new lender takes over your unpaid loan and pays the due amount to the existing lender. Your old loan account is closed, and a new home loan account with the new lender is opened.
You now pay EMIs at a favourable term to the new lender.
For example, you take a loan of Rs 50,00,000 from XYZ financial institution at 10% for 20 years. After a few years, you might want to transfer your loan to ABC financial institution, which offers a loan at 9%. You have paid 10% of your loan by that time, so only the unpaid amount of Rs 45,00,000 lakh is transferred to the financial institution that takes over your loan.
Advantages Of A Home Loan Balance Transfer
Balance transfer of a home loan offers the following advantages.
Lower Home Loan Rates
This is the most common reason for a balance transfer, and quite understandably. If the rates fall after you take a loan and your lender adjusts your rates, you can benefit from a lower interest regime.
However, if your lender does not pass the lower rate benefits to you or you find a lender who offers a home loan at lower rates, you can bring down your EMIs by a loan transfer.
A small change in the rate can impact your EMI substantially.
Change In Loan Tenure
When you sign a loan agreement, you agree on a fixed interest rate and loan term for your home loan. The rate and loan duration decide your EMI.
Sometimes due to various factors, you may find it difficult to pay your monthly instalments after a few years. In such a scenario, a loan transfer can benefit you.
A balance transfer of a home loan allows you to renegotiate your loan tenure and extend it if you wish to.
You can also opt for a shorter term if you can pay bigger EMIs.
Top-up loans are loans over and above your existing house loan. These loans can help you deal with many unforeseen financial expenditures.
Applying for a home loan balance transfer allows you to apply for a top-up loan.
Is Balance Transfer A Good Idea?
Though balance transfer offers a few advantages, to opt for it or not will depend on a few aspects.
Today, home loan interest rates may be lower than your loan rates, but a loan transfer will benefit you only in the initial years of your loan term. Switching to a new lender in the early years of loan repayment allows you more time to enjoy the benefits of lower rates.
A balance transfer may not be a good idea in the last phase of the loan.
A loan transfer also involves costs like a new loan does. You may have to pay some penalty to the existing lender apart from the processing charges levied by the new lender.
The main motive behind a home loan transfer is saving money through lower interest rates.
Compare the overall savings with the cost you would incur; if the savings are substantially higher than the expenses, you can consider a home loan balance transfer.
Another crucial factor to consider when considering a balance transfer is the processing time.
Find out how long the entire process will take and if you can devote the required time.
The balance transfer of a loan process is similar to the process of taking a new loan. The lender taking over your loan would look at your credit history to assess your creditworthiness.
If your credit score is low, you might want to consider something other than this option.
To Sum It Up
A home loan balance transfer is a good option that allows you to benefit from lower interest rates or a longer loan term. However, it is an option that you should evaluate carefully; whether it is a good idea or not would depend on a combination of factors discussed above.