When Should You Consider Availing a Home Loan Balance Transfer Facility?
When you commit to a home loan, you choose the best deal available. However, with changing times and financial situations, you will likely come across better deals that suit your requirements. Therefore, it might sometimes be logical to transfer your home loan balance to a different lender willing to offer you better terms and benefits. Read on to understand how the home loan transfer facility works and when you should apply.
What Is a Home Loan Transfer?
Home loan transfer or refinancing is a process where borrowers transfer their outstanding home loan balance to another lender offering better interest rates and other repayment terms. Most lenders or creditors allow customers to transfer their home loan balance to another account. However, availing of such services requires you to fulfil certain eligibility criteria specified by the lender.
How Does a Home Loan Transfer Work?
When you opt for a home loan transfer, your new lender pays off the outstanding debt to your existing lender, who then closes your loan account. Subsequently, with the new lender, a new account is created for your outstanding house loan with favourable rates and loan payback conditions.
Lenders are increasingly offering pre-approved home loan balance transfer facilities with low-interest rates and numerous advantages to draw in more clients. However, you must carefully analyse the offer to check if it suits your requirement and doesn’t involve any hidden charges.
When Should You Apply for a Home Loan Balance Transfer?
Before availing a balance transfer facility you must determine if the move is going to benefit you and your credit score. Here is the list of scenarios where you may want to opt for a home loan balance transfer.
Avail Lower Interest Rates
You must go for it if you have a better opportunity to save money by transferring your loan to a different lender offering lower interest. Even a small difference can make a significant impact in the long run. Let us understand it with an example.
Suppose Bank 1 is your existing lender, whereas Bank 2 is the new lender offering lower interest rates.
- Bank 1
You have outstanding funds worth ₹10 lakh at a 10% per annum interest rate for a remaining tenure of 2 years.
Your EMI will be ₹46,145.
The total payable amount would be = ₹11,07,478
Therefore, the total interest payable would be = Total amount – Principal amount = ₹1,07,478.
- Bank 2
If you had transferred your outstanding debt to Bank 2 offering an interest rate of 9% the scenarios would have been
EMI = ₹45,685
The total amount payable would be = ₹10,96,434
Therefore, the total interest payable would be = ₹96,434. This will save you ₹11,044.
The example above clearly states how transferring your outstanding loan with a lower interest rate can help save you a significant sum of money.
Extend Your Loan Repayment Tenure
New lenders often restructure your loan terms and may allow longer repayment tenure. But first, do a thorough cost-benefit analysis to determine if you benefit from your home loan balance transfer after paying the service and transfer fees.
For example, it makes no sense to transfer your debt to another account if you can save interest worth ₹1,00,000 by transferring your pending home loan, and the service charge is ₹1,30,000.
You Have Higher Outstanding Principal
The amount of loan outstanding is directly proportional to the money you can save with a lower interest rate because a home loan EMI constitutes more of the interest component towards the beginning of the tenure and a higher principal component towards the end. Therefore, if you have paid most of your loan, you have already repaid most of the interest.
Therefore, you must only transfer your home loan when you have sufficient debt outstanding. The ideal time would be towards the beginning of your loan tenure.
Another Lender Is Offering Better Features
Every lending service has distinct, Unique Selling Propositions (USPs). In addition, the features and offers of loan products are constantly upgrading. Therefore, you may find new lenders offering even more favourable repayment terms or additional benefits than your current loan. These features may include no prepayment charge, free foreclosure of home loans, etc.
One prominent benefit you can avail from a home loan transfer is the top-up facility. It allows you to apply for higher loans up to a certain percentage of the transferred debt at a lower interest rate.
For example, suppose you want to transfer ₹10 lakh worth of outstanding home loan debt to another lender and need an additional ₹1,00,000 for renovation. A top-up facility can help you avail ₹20,000 at a comparatively lower interest rate than a personal loan. The interest levied on the top-up facility is only 1.5% to 2% higher than the home loan.
Change the Type of Interest Rate
Home loans carry either fixed or floating interest rates. The fixed interest rate remains constant, whereas floating interest varies per the repo rate and market scenario.
Say the home loan interest rates are expected to decrease, and you have opted for a fixed-rate loan, then you may switch your lender for a floating interest rate to enjoy the benefits of a lower rate. Similarly, if you have opted for a floating interest rate while the interest rates might rise, you may look for lenders offering fixed interest rates.
However, it’s necessary to have an understanding of the expected interest rate scenario for the entire tenure of the loan to make effective decisions on the type of home loan.. In addition, please note that it is never advisable to constantly transfer your home loans to cut your interest rates as it carries additional charges, which may exceed any savings you can make.
What Are the Documents Required for a Home Loan Transfer?
You will need the following documents to transfer your pending home loan to a new lender:
Document Stating Personal Information
Documents like your identity proof (PAN, driver’s licence, voter ID), residential proof (utility bills), loan application form, photographs, etc.
You will need to submit your last 6 months’ bank account statement to your new lender to get your home loan balance transfer approved.
Property documents include the sales agreement, occupancy certificates, No Objection Certificate (NOC) from builders, etc.
Proof of Income
The last 3 months’ salary statements or Form 16 are necessary for salaried individuals. For self-employed individuals, their audited profit and loss account, balance sheet, income tax returns, etc.
In addition, you will need to submit a letter to your existing lender requesting a home loan transfer, who will publish a NOC, and transfer all your financial documents to your new lender. Finally, ensure that you retract any post-dated cheque from your previous lender.
If you pay your home loan EMIs on time and have an excellent credit score, your existing lender may hold onto you and be open to negotiating better terms. This way, you can avoid the hassles of loan transfer and the tiresome documentation. However, if you wish to opt for a home loan transfer, research the new lender’s profile and services well.
Frequently Asked Questions (FAQs)
How often can I transfer my home loan balance?
You can transfer your home loan balance after the end of the agreed lock-in period, which may be 6 months to 1 year. However, transferring your home loan balance too often can result in multiple hard inquiries, which may lower your credit score.
Is there a penalty levied on the foreclosure of a loan?
Some banks may charge a prepayment penalty of 1-3%, whereas other lenders may not charge anything for the foreclosure of loans.
How long does it take for transferring the home loan balance to another account?
Generally transferring your outstanding home loan may take up to 15 to 20 days depending on the lender and their formalities.
Will a home loan transfer affect my credit score?
Usually, a clean loan transfer to another account does not affect your credit scores directly. However, multiple inquiries may affect your credit score.