What not to ignore before opting for home loan balance transfer 

• Follow

The low interest rate regime allowed many lenders to offer attractive home loan interest rates starting from 6.65%-6.95% p.a. With such low rates on offer, existing borrowers servicing their home loans at much higher interest rates may contemplate to transfer their existing home loans to other lenders at lower interest rates and/or better terms of service. 

If you are among such borrowers, make sure to consider these key factors before switching your existing home loan to another lender:

 Calculate overall savings in total interest cost

The primary objective behind most home loan balance transfers is to reduce the interest cost for existing home loans, especially those availed at much higher interest rate, without affecting the liquidity and existing investments of the borrower. This option is especially beneficial for existing home loan borrowers who can avail home loans at much lower interest rates due to their improved credit profile.

However, as balance transfer requests are considered as fresh home loan applications by the new lenders, they levy processing fee, administrative charges and other charges at the time of processing new loan application. Hence, borrowers should calculate their overall savings in interest cost after taking into consideration such charges, if any. One should opt for the balance transfer option only if the overall saving in interest cost is significant enough after factoring in the costs involved in doing so.

While transferring their existing home loan, borrowers can consider the home loan overdraft option, a home loan variant, if offered by the new lender. Under this option, an overdraft account in the form of savings or current account is opened and linked with the new home loan account. The borrowers can deposit their surplus funds in this overdraft account and withdraw from it, in case of any fund shortage. As the balance in the overdraft account is deducted from the outstanding loan amount while calculating the interest of home loan, it reduces the interest cost for the home loan borrower. This home loan variant allows the borrowers to avail the benefit of making prepayments without compromising their liquidity. 

Residual tenure of the existing home loan

Availing home loan balance transfer during the later stages of the loan tenure would not be of much use for most. This is because home loan borrowers must have paid the majority part of their interest component during the earlier stages of the tenure itself, thereby implying a relatively lower scope of significant overall interest cost savings during the later stages of the repayment tenure.

  Those opting for home loan balance transfer should always try to keep the repayment tenure of their new home loan the same as the remaining tenure of their existing home loans. A longer loan tenure would result in higher interest cost. Only those seeking to significantly reduce their EMI burden should opt for a longer tenure. Such borrowers should try prepaying the loan later on, as and when they have surplus funds, to reduce their interest cost.

Renegotiating interest rates with the existing lender

As a home loan balance transfer will be considered as a fresh loan by the new lender, the home loan borrower will have to once again go through the loan evaluation, property evaluation, documentation and other processes associated with any fresh home loan application. All these can involve significant time and effort for the home loan borrower. Hence, home loan borrowers should try to renegotiate their interest rates with their existing lenders before transferring their existing home loan to another lender. They should opt for home loan balance transfer only if the existing lender refuses to match the interest rates offered by the other lenders.  

Author is Head of Home Loans, Paisabazaar.com. Views are personal