Everyone dreams of a house of their own but with the inflated property rates, you are bound to take home loans. Home loans take up the biggest piece of pie in the loan precinct. It takes years to repay and at the same rate of interest initially agreed upon. So, when the trend of home loan rates change/get reduced in the market over the subsequent years and you are still repaying at a higher rate, it breaks your heart. But no reason to sulk because you too can take the benefit of reduced interest rates by taking advantage of the home loan balance transfer facility.
What is home loan balance transfer?
Home loan balance transfer allows you to transfer your unpaid home loan amount to another bank to avail the benefits of reduces interest rates. Many times your current loan lenders do not change your interest rates as per the market trend and you end up paying higher when their new customers are availing the loans at reduced interest rates.
When one opts for a home loan balance transfer, the entire unpaid principal amount of the loan is transferred from the existing bank to a new bank. Obviously, the new bank will charge a lower interest rate; the bank taking up the loan pays the balance principal amount due to the previous bank that originally sanctioned the loan. Then the customer pays the EMIs to the new bank at the new rate. Even a slight reduction in rate of interest can amount to considerable savings in the long run.
Factors driving the customers to opt for home loan balance transfer
Reduced interest rate is the foremost factor compelling people to switch their banks. Other factors can be dissatisfactory service and the bank creating unnecessary trouble for the customer. Also no facility of top up loans can also trigger the customer to make the loan transfer.
Top-up loan is an additional loan you can take over the top of your prevailing home loan for your other needs.
Before making up your mind to transfer your loan you should first try to negotiate with your current lender, many banks agree to talk and come to a satisfactory agreement with you rather than lose their business.
What else to consider?
This is a pivotal question; there is no clear yes or no answer to this. The lower rates of interest should not be the sole criteria on which you decide to transfer your home loans. You need to ask yourself the following questions.
Total cost- There is actual cost involved in this process. When you make the loan transfer and pay your previous bank, the bank may levy a prepayment penalty on you, this may be some percentage of your outstanding amount or a fixed amount. Apart from this your new bank may apply processing fees, stamp duty, legal charges, valuation fee, technical charges and other allied charges. You should calculate the total in and out of cash and see if it is worth all the hassle. Because transfer costs have to be paid immediately but the savings are spread out all throughout the remaining repayment tenure.
Remaining loan tenure and outstanding principal- If there is less time left in completion of the loan tenure then it might not be worth making the effort for a home loan transfer. If the remaining loan repayment tenure is long, the transfer cost will be amortized over the remaining loan duration. Furthermore a bigger principal amount outstanding makes more sense when transferring a home loan because a bigger unpaid amount results into more savings.
Beware of teaser loans- Many banks in their home loan balance transfer facility lure the customers with teaser loan rates. Teaser loans are where the customers pay a really low interest in the initial years which gradually becomes very high afterwards. Do not fall prey to teaser loan rates of interest.
Time and effort- Making a home loan balance transfer demands the same time and effort required when applying a fresh home loan request. Your new bank needs to see and recheck all the documents and it is on the complete discretion of your new bank’s terms and policies to accept or reject your loan plea.
Tax benefits- Home loan principal repayment up to ₹ 1.5 lacs is eligible for tax deduction under Section 80C of IT Act. Additionally, interest payment on a home loan (self-occupied) is eligible for deduction up to ₹ 2 lacs under Section 24. If you refinance your loan at a lower interest rate, your total interest outgo will decrease; this may result in lesser tax benefits.
So, with all the above to contemplate, you need to be thorough in your research and calculation and see if switching to lower interest rates are really going to benefit you substantially in the long run or not.