The Reserve Bank of India mandates that lenders cannot charge prepayment or foreclosure penalties from individual borrowers who have availed of a loan for any purpose other than business. This was not the case until a few years ago when borrowers had to pay a hefty penalty in case they decided to part prepay or close their loan earlier than expected.
This fee acted as a huge deterrent and kept people from transferring their loans to another lender, even to one offering a much lower home loan interest rate and much better home loan terms and conditions. Further, since the lenders had the upper hand, they often did not also pass on the benefits of home loan rate cuts to borrowers.
This means that home loan borrowers kept repaying their loans at a much higher interest rate even when the RBI reduced the Repo Rate and home loans became cheaper. Fortunately, this is not case the anymore.
Today, home loan borrowers on floating interest rates can prepay their loans at any time without paying any fee or penalty. Borrowers on fixed interest rates, however, are still required to pay a prepayment or foreclosure fee, which varies between 3% to 4% of the pending loan amount.
The biggest benefit of this new RBI policy is that home loan borrowers can now foreclose their loan at any point in their loan journey and choose to get it refinanced from another lender willing to offer better loan terms and conditions.
Home loan balance transfer or home loan refinancing refers to the process of transferring one’s home loan from one’s current lender to another one willing to offer more favourable loan terms and conditions, such as lower home loan interest rates, a higher home loan sanction, longer repayment tenor to ease the burden of home loan repayment, etc.
When a home loan borrower applies for a home loan balance transfer, the new lender treats their application as a new home loan application. Therefore, the eligibility of the applicant is thoroughly tested before the applicant’s request is accepted. Further, home loan balance transfers involve a fee. While your old lender cannot charge you a foreclosure or prepayment fee, your new lender will charge you a home loan balance transfer fee.
The home loan balance transfer fee varies between 0.25% to 0.50% of the remaining loan amount. Borrowers must opt for a home loan balance transfer after performing a proper cost-benefit analysis and only when the savings facilitated by a home loan balance transfer are sturdy enough to help a borrower easily cover the home loan balance transfer and build some savings too.
In this article, we look at the benefits of a home loan balance transfer and try to understand when a home loan balance transfer would be the right choice for you.
Benefits of Home Loan Balance Transfer: When Should You Go for It?
1. You Benefit from a Lower Rate of Interest
Most home loan borrowers opt for a home loan balance transfer to benefit from a lower rate of interest. The rate of interest that a borrower gets offered on a home loan determines the affordability of a loan. Low home loan interest rates translate into low EMIs and reduced interest outgo.
They ease the burden of loan repayment. So, if there is another lender offering you a loan at a much lower rate of interest, go for it. A home loan balance transfer proves beneficial when there is at least a 25bps difference in the old and new home loan interest rates.
However, do keep in mind that do not go ahead with a home loan balance transfer if the reputation of your new lender is dubitable, even if they are offering you a much lower rate of interest. A home loan is a long journey and one, therefore, needs a loan partner they can trust.
2. Go for a Home Loan Balance Transfer If Not Happy with Your Loan Terms and Conditions
The home loan rate of interest is important but so are other loan terms and conditions. For instance, it is crucial to choose the right loan tenor and the right interest rate regime to reap maximum benefits and simplify the burden of loan repayment.
If for whatever reason your current loan EMIs seem unaffordable to you, you can benefit from transferring your loan to another lender and opting for a longer repayment tenor. This will reduce your EMI amount and ease the burden of loan repayment.
On the other hand, if you want to become debt-free as soon as possible and can afford the burden of higher EMIs, you should go ahead with a shorter tenor while opting for a home loan balance transfer.
The interest rate regime you choose is important too. While it makes the most sense to opt for a floating rate of interest most of the time, a fixed interest rate regime can prove to be better if you anticipate the home loan interest rates to go up in the near future.
Home loan borrowers are given the option of changing both the loan tenor and the interest rate regime while opting for a home loan balance transfer. If you want to change either of the two, you should go for a home loan balance transfer.
3. Choose to Transfer Your Home Loan if You Need Extra Money
When home loan borrowers apply for a home loan, they are given the option of availing of a top-up loan. Lenders charge a slightly higher rate of interest on this top-up loan than your home loan interest rate.
Further, the tenor for these loans is also quite long. Top-up loans also come with no end-use restrictions and home loan borrowers can use them to meet all kinds of needs. Opt for a home loan balance transfer if you want to avail yourself of a top-up loan.
A home loan balance transfer certainly offers many benefits. However, the process of finding the right lender to transfer your home loan to and the process of transferring the loan itself is lengthy and tiring.
Therefore, before applying for a home loan balance transfer, it is recommended that you first talk to your current lender and see if they are willing to refinance your loan on terms and conditions that suit you. If you have been an ideal borrower, your current lender may agree to your request.
This is a win-win situation for both: you will be saved from having to pay a hefty home loan balance transfer fee and having to go through the hassle of transferring your loan from your current lender to another and your current lender will be able to retain you as a client and profit from the business you provide them.