The festival season is here! It’s time for new beginnings and shopping and sweets and celebrations. Almost on a cue, on September 29th
Mr. Raghuram Rajan announced rate cuts which prompted some banks to follow suit and lower their lending rates. This is expected to add cheer to the home loan market and move the almost stagnant reality sector and attract new buyers.
Mr. Mehta is not so buoyed by this entire rate cut euphoria; he already has a home loan which is at a higher rate and he has no way of benefitting from these lower rates; or so he thought. His friend suggested him that he should explore the option of home loan balance transfer to take advantage of the lower rate regime.
What is Home Loan Balance Transfer?
Home Loan Balance Transfer is an option that allows you to benefit from a downward movement in lending rates. Lending rates often change with the market condition. Often in floating rate home loans also the lender may not lower the interest for the customer or may not reduce it enough which means new loans are available at still lower rates.
When one opts for a balance transfer process, the entire unpaid principal amount of the loan is transferred from the existing bank to a new bank. Obviously the new bank will be charging a lower interest rate; the bank taking up the loan pays the balance principal amount due to the bank which originally extended the loan. The customer subsequently pays the EMIs to the new bank at the new rate.
Can a Home Loan Transfer Benefit You?
Now we come to the crucial question. Can a home loan transfer benefit you? There is no clear yes or no answer to this. A home loan transfer can benefit you only in certain conditions; even if a bank offers lower interest rate it may not be a economically viable to transfer a home loan if the savings are not enough to justify the time, effort and cost. Following factors contribute to the decision making when considering whether to transfer a home loan or not; they are:
Remaining Loan Tenure
Time and Effort
In case you are wondering that is there actually a cost involved in making a home loan balance transfer? Yes there is! When you transfer a home loan the cost involved includes the processing fees (charged by the bank taking over the loan), pre-payment penalty (may or may not be charged by the existing lender) and some charges like stamp duty etc.
While pre-payment penalty is generally waived off by most banks as NHB and RBI discourage banks from charging it but other charges are unavoidable. Total savings can be determined after considering the total cost involved.
Remaining loan tenure is also a crucial factor; 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 duration is long then the cost will be amortized over the remaining loan duration else the cost burden will not be justified. Again a bigger principal amount outstanding makes more sense when transferring a home loan because a bigger unpaid amount translates into more savings. Consider this example:
Rohan has an outstanding loan amount of 20 lakhs @ 10% and remaining loan tenure of 15 years. If he switches to a loan at 9% interest rate his yearly savings would be Rs. 14,484 and total savings Rs.217, 260.
Dhruv also has a loan @ 10%, with 15 more years remaining, his unpaid principal amount is 25, 00,000. If he switches to a loan at 9% his yearly savings would be 18,336 and total savings for 15 years Rs. 275,040.
Thus it is obvious that a bigger outstanding principal justifies the cost more due as the total savings are more. Do keep in mind loan transfer like a new home loan involves time and effort which obviously cannot be measured in monetary terms. You will have to research which bank to transfer the loan to, liaison with your bank and the new bank, submit applications, get documentation in place etc.
Thus a home loan transfer makes more sense in the early years of loan and for a bigger outstanding amount, provided the differential in rate cut justifies the effort involved and you are willing to spend time for doing so.
Before You Transfer Your Loan……
Before approaching another bank check with you existing bank if they are willing to reset the rate
. If the market conditions warrant most banks would be willing to retain their customers and re-negotiate the loan rate. Even if the new rate offered by your existing bank is not as low as what the competitor is offering it makes more sense as it involves no processing fee, no pre-payment charges, no running around.
Do explore the option of a home loan transfer; it can benefit you in certain conditions. However the decision should be made after a careful cost benefit analysis.
The author is Co-Founder & Director, CreditVidya.