Home loans are long term loans. The repayment spans over the years, at times as long as 30 years. And because of this long repayment term, any change in market competition or economic trends is bound to send ripples across the lending business.
A drop in lending rates will surely attract fresh borrowers. But as an existing home loan customer, whether you have an SBI home loan or HDFC Home Loan, you can start feeling the pinch as the higher interest rate on home loans will make the loan repayment burdensome.
Balance transfer of home loans thus comes across as a breather. It is a refinance option that allows the customer to move his ongoing home loan to a new lender that provides more competitive home loan features, especially in terms of reduced interest rates and other attractive benefits.
As the borrower is moving from a higher rate of interest to a lower one, this will lead to a drop in overall interest outflows. The reduction in interest component will be reflected in reduced EMIs. The overall change leads to comprehensive savings, making home loans more lucrative than before.
But if you are transferring home loans, there are important points to consider before you do so. These include:
Check possibility of home loan balance transfer
The journey for balance transfer of home loans begins with looking for a new lender. But before one starts onto this cumbersome journey, it is important to carefully read through the fine lines of the terms and conditions of the current lender. Check if your existing documents do not carry a clause that restricts you from availing of a home loan balance transfer option.
Negotiate with the current lender
Though switching home loans from one bank to another will enable you to save on the interest, it also attracts fresh loan processing charges and related outflows. All these add to the home loan cost. So, while it is ok to get wooed by low home loan interest rate as is the case with SBI home loan interest rate which is available at rates starting from 6.90% p.a., it is important to read all the scheme related documents to understand other charges under different heads.
At this juncture, especially if you are a loyal customer with a good financial history, negotiate for a lower rate of interest with your current lender. By doing so, you can avail the benefits of a lower interest rate without having to pay for transfer charges.
Know your remaining loan repayment tenure
The end result of a home loan balance transfer to a new lender will reap the best results if you still have a repayment tenure of more than five years remaining on your ongoing loan. As interest on home loans are linked to MCLR rates and RBI makes adjustments in home loan interest rates periodically, switching lenders makes economic sense only when the remaining tenure exceeds five years.
It is vital to understand that while the impact of a lower interest rate offered by the new lender will be visible, having to pay loan processing fees and other miscellaneous charges once again on switching lenders will square off such benefits.
Confirm your interest rate type
Home loans are available at both fixed-rate and floating interest rates. If you had availed of the initial home loan at fixed interest rate charges, a subsequent drop in MCLR rates would not have any impact on your home loan EMI. But switching from fixed to floating home loan interest rate charges is possible only when you opt for refinancing of home loans.
Re-check your current credit rating
A loan transfer is like taking a fresh loan to repay your ongoing loan. Therefore, credit rating while opting for a balance transfer is as important as it was during the time you took the initial home loan. In case there have been delayed payments and defaults in the EMI outflows on your ongoing loan, this will hamper your credit rating.
A poor CIBIL pulls down your chances of qualifying for the best and lowest rate of interest through balance transfer.
Check for Prepayment Penalties
Both banks and non-banking finance companies are proscribed from levying any prepayment penalties if one wishes to close off a home loan before the stipulated tenure. This is applicable on both closure through own funds and closure through balance transfer. But the clause generally prevails after a specific number of EMIs have been successfully paid.
This number varies from lender to lender. Check for your current terms and conditions and ensure that you do not shell out additional expenses for loan prepayment to the existing lender.
Check property authorisation with the new lender
Not all properties are authorised by every financial institution. Different lenders follow different procedures to approve properties. When searching for a new lender for refinancing home loans, check if your property features in their approval list before proceeding.
The new lender will require all your property-specific documents. The property remains as collateral with the new lender until the loan is paid in full.
Assess and evaluate the home loan terms offered by the new lender
While it is easy to consider refinancing home loans, the process entails quite a few intricacies that need to be dealt with deliberately before proceeding with the new deal. Search for a new lender that offers the lowest interest rate like SBI home loans and has an affordable finance structure with a minimal processing fee and other charges.
It is essential to read the terms and conditions of the home loan deal offered by the new lender very carefully to avoid any hidden charges subsequently.
Wisely opt for the new loan tenure and principal amount
If executed wisely, home loan balance transfer confers a range of benefits. In addition to lowering your interest expenses, it allows you to readjust your loan term as well as the principal amount. You can opt for a longer or shorter loan term depending upon your current financial inflows.
Also, one can apply for a lower principal amount and self-finance the balance. Alternatively, increase the principal amount further and use the excess amount for upgrading your property.
A home loan balance transfer is a viable option that helps reduce the interest payable on home loans. But to ensure maximum savings, experts suggest that the interest rate difference between the ongoing and refinancing scheme should be at least 0.25%-0.50% p.a.