Paying High Interest on Your Home Loan? Here’s All You Need to Know About Loan Transfers

Buying a home is a milestone for every Indian. And rightly so. The amount of time that goes into zeroing in on the home you want to buy and then the bank from which you want to borrow money does take time and energy. The research that goes into deciding which bank or finance corporation to borrow from is, in fact, one of the most important since it will determine how much EMI you end up paying.

But at times, no matter how much of research you put in, there could be a situation wherein you realise that you aren’t able to comfortably pay the EMI on your home loan. If you thought that you would just have to live with this discomfort, think again. Thanks to home loan balance transfers, you can always transfer your existing home loan to a bank that is willing to offer a lower rate of interest or a longer tenure.

What is a balance transfer?

A balance transfer, as the name suggests is the shifting of an existing loan to another bank. Here’s how it works:

  • The balance on your existing loan is repaid by the new lender in full.
  • You then start paying the EMI on that amount to the new lender under new terms.

When should you consider a balance transfer?

You should consider a balance transfer if you find another bank offering a lower rate of interest than that offered by the current bank.

Before you switch, though, you need to take a few things into consideration. This includes the cost of switching.

If you have borrowed money from a bank at a fixed rate of interest, you will be charged a pre-closure fee. This can range anywhere from 0.5% to 2% of the outstanding balance. In some cases, this fee can even be 5% of the outstanding loan amount.

Now, if there are a few years left before your loan matures, you need to see if switching your existing loan to that of another bank will actually have monetary benefits.

For instance , let’s assume that you took a Rs.30 lakh home loan for 20 years. Of this, you have Rs.6 lakh left to pay for the next 2 years. You have paid the EMI for the last 18 years at 9.5% p.a. The pre-closure charge is 2% of the outstanding amount (Rs.12,000). The interest on your new home loan is 9.1% p.a. and the processing fee is 2% p.a.

The old EMI was Rs.27,964. The new EMI amount is Rs.27,438. The difference in EMI amounts is Rs.526. So, in a year you save Rs.6,312 and in two years you save Rs.12,624.

However, you paid Rs.12,000 as a pre-closure penalty. This means that by transferring the loan you actually end up saving only Rs.624. This amount is too small for the hassles involved in transferring your loan.

This is why it becomes important to calculate the actual cost of the transfer.

In general, you should consider a balance transfer when the remaining tenure on your loan is quite high. If your loan is close to maturity, you either don’t save at all or the savings are marginal and isn’t worth the hassle that comes with a balance transfer.

Things to keep in mind about pre-closure fees if you are considering refinancing your home loan

When it comes to transferring your home loan balance, here are a few things you should be aware of:

  • As per RBI guidelines , pre-closure penalties can be charged by banks only if the interest rate on your home loan is fixed. Floating interest rates are not to be charged any fee. So, there is a significant amount you can save in this case.

  • When it comes to loans taken from housing finance companies (HFC) , a pre-closure penalty can be levied only if you have a fixed interest rate package. However, if you repay the loan with money from your own sources , the HFC cannot charge you with a fine. Only in cases where the pre-payment of the loan is made using funds from another bank loan or HFC loan, can the existing HFC charge you a pre-closure fee.

  • For home loans with special interest rate packages which allow you to pay a fixed rate of interest for a certain period of time and then a floating rate of interest, the rules remain the same. A penalty can be charged only if you refinance your home loan during the period when a fixed rate of interest is being charged.

Advantages of a home loan balance transfer

Apart from availing a lower rate of interest and hence having to pay less each month, there are other advantages to transferring the outstanding balance on your home loan from one bank to the other. They are:

  • Minimum documentation: As part of your home loan process, you would have already submitted documents to the bank. So, it becomes much easier for the new loan provider to verify the documents. At most, you may have to provide a few more documents which should not be too much of a problem.

Ability to make prepayments: Even though you have closed your loan with your existing lender and have moved it to a different bank, you can still prepay your loan. The prepayment and pre-closure penalties remain the same.

No hidden fees: Apart from the processing fee and in some cases a documentation fee, there is no extra fee or charge involved if you do happen to transfer your loan from one bank to the other.

Eligible for a top-up loan: If you wish to take a top-up loan on the amount you have transferred, you are eligible to do so. If the bank you have switched to provides top-up loans, you can take up to 25% of the principal amount as a top-up loan. However, do keep in mind that your EMI will increase to reflect this change.

No CIBIL score impact: Your balance transfer doesn’t affect your CIBIL score in any way. The new lender will not do a check on your CIBIL score again since the first lender would have already done so. As a result, your credit report will not be pulled up. If, however, you haven’t made payments on your loan regularly, it will affect your CIBIL score.

Factors to keep in mind while considering a home loan balance transfer

  • If the new loan offers a floating rate of interest, keep in mind that the interest rate could increase and you may not enjoy the low interest rate you currently do.

  • Since the bank isn’t allowed to charge a penalty on pre-closure if you have a home loan which charges a floating rate of interest, they could also offer you a lower rate. Banks will do this since they wouldn’t want to lose a customer. This will save you the hassle of switching loans, submitting documents again, etc.

Now that you know all that there is to know about transferring your home loan, rest assured you will be able to make the right decision.

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