Transferring existing home loan balance to a different lender is often a simple way to take advantage of lower rates prevailing in the financial market. A survey predicts a CAGR of 22% for the housing loan segment between 2021 and 2026, which should also increase the demand for such loan refinancing options, given the present market scenario that invites an interest rate drop.

  • Due to the current economic crises, the Supreme Court of India declared that no loan should be termed NPA until further notice, as of September 2020.

Still, when these relaxations end, existing borrowers may find it challenging to service loans at pre-existing rates. Under such a scenario, a home loan balance transfer comes forth as a viable refinancing option for repayments at reduced rates.

Home loan refinancing: How does it work?

A home loan transfer involves two lending institutions, i.e., the existing lender, with whom the borrower is currently repaying the home loan, and the new lender with whom he/she seeks to transfer the outstanding principal. In the transfer process, the latter pays the pertinent sum and forecloses a borrower’s loan with the current lending institution.

Next, the borrower starts servicing the existing principal sum with his/her new lending institution at lower rates as agreed for. Nevertheless, to ensure maximum benefit, one must also initiate a home loan balance transfer at a suitable time. Ideally, refinancing is beneficial during the initial years of repayment since the interest component in one’s EMIs is higher at this stage.

Moreover, such a balance transfer only proves beneficial if the difference in interest rates between the two lenders is 50 basis points (bps) or more.

Here, 100 bps equal 1%, whereby a 50 bps reduction can bring down the interest rate by 0.50%, resulting in a suitable saving given that home loans are high-value advances serviced for a long term of up to 20 years.

Thus, missing out on securing the ideal rate reduction may result in the additional charges and processing fees associated with the move cancelling out any interest savings.

Steps involved with a home loan balance transfer

An individual interested in such a refinancing can follow the steps mentioned below –

  • Step 1: Submit an application for balance transfer to one’s existing lender. It can be done so via a letter or an online form, which borrowers need to fill-up and submit.
  • Step 2: After this application is processed, the HFC would provide a no-objection certificate to its borrower.
  • Step 3: Submit this NOC, along with an application form and all other pertinent documents, to your new lender. Some of the necessary documents include property papers, existing loan balance statements, and more.
  • Step 4: One of the essential things to know about home loan balance transfer is that it involves all of the steps of acquiring a new credit. Therefore, a borrower would need to clear processing fees and additional expenses with the new lender during a refinancing. Additionally, one may need to bear foreclosure charges with his/her existing lender as well.

How does a balance transfer help borrowers?

To understand profitability from such a move, take a look at the following example.

Consider that a borrower acquires a housing loan of Rs.25 lakh at 8.6% for a tenure of 20 years. With 18 years remaining, he/she decides to shift the existing dues to a new lender offering rates of 8%. Using a home loan balance transfer calculator, one can determine profitability in this case.

Herein, such a transfer would result in savings of Rs.1,97,856 on the entire cost of the loan. However, this figure does not factor in the additional charges, such as processing fees and others. Thus, the actual savings would be more limited. Assessing this calculation should help one understand how a home loan balance transfer works to help save on your advance repayments.

  • MCLR and RLLR-based home loan customers can expect to take advantage of the repo rate reductions, amounting to around 250 bps between February 2019 and August 2020.
  • Other existing housing loan borrowers can opt for a balance transfer to avail significantly lower rates.

Top-up loans on balance transfer

Lenders extend special credits in the form of top-up loans to customers availing a balance transfer facility. Using a top-up loan calculator, individuals planning a balance transfer can assess their eligibility for this credit. Among things to know about these top-up loans on home loans is the fact they come with no end-use restrictions. Thus, a borrower is free to utilise such proceeds as deemed necessary.

For example, they can use the same to renovate a purchased property. Alternatively, it can be utilised to finance short-term expenses, such as an international family vacation, cost of higher education, etc. Reputed lenders offer up to Rs.50 lakh as such loans to eligible candidates. Still, one must be mindful to check top-up loan interest rate beforehand for maximised benefits.

Moreover, since such credit options run simultaneously with one’s home loan repayment, servicing both can be challenging. Besides lower interest rates and top-up loan availability, a borrower must also consider whether his/her new lender provides additional facilities.

For instance, reputed lenders provide pre-approved offers to simplify and accelerate loan processing. These offers are available on a range of financial products, such as home loans, loans against property, and more. One can check his/her pre-approved offer by submitting a few details, such as name and contact information.

As for the refinancing facility, undertaking a home loan balance transfer requires you to possess an in-depth understanding of this credit’s amortisation schedule. Assessing the bifurcation of interest and principal component during a housing loan tenure can help assess the best time for refinancing.

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