A home loan is a long-term financial commitment. The repayment duration generally lasts for 15-30 years. However, this does not mean you must continue your home loan with the same lender you chose initially for the full term.
If you are not satisfied with the services of your current lender or if you feel the lender is charging you higher interest than the market standards, you can switch your loan to a different lender who is offering the loan at a lower interest rate or with better benefits.
The process of moving your outstanding home loan from one lender to another to avail the benefits of a lower interest rate is called a home loan balance transfer. When you transfer your loan from one lender to another, the new lender pays off the outstanding amount to the existing lender and closes the home loan account. At the same, a new home loan account starts with the new lender, and you can repay the amount at a comparatively lower interest rate.
When should you opt for a home loan balance transfer?
Many people think they can transfer the home loan immediately if another lender is offering the loan at a lower interest rate. However, you must take several factors into account before you initiate the home loan balance transfer process.
You must do a cost-benefit analysis and get a clear idea of how much you can save due to the difference in the home loan interest rate. If you are not sure when to transfer the loan, discussed below are a few instances when balance transfer makes sense.
- The RBI revises the interest rate
The Reserve Bank of India regulates the CRR and bank rate from time to time. Any revision in these two may result in a lower interest rate. However, you must know that the interest rates are flexible and can fluctuate from time to time.
So, if the potential new lender is offering a lower home loan interest rate that will reduce your EMI burden, you can consider transferring your home loan.
- There are no costs involved, or you get better loan terms
Transferring the home loan to a new lender when the interest rates are low is not a wise idea. You must know that there are several costs associated with a home loan, like transfer costs. Also, the new lender may have certain terms and conditions for the transfer.
So, it is paramount that you carefully analyse the costs and the terms and conditions. And, if the new lender is not charging processing fees, documents assessment fees or transfer charges, you can switch your loan.
- The outstanding amount is high
Many financial experts recommend transferring the home loan within the first 5-10 years of the loan term. This is because when you repay the loan in EMI, during the initial years, a major portion of the EMI amount goes towards repaying the interest.
Hence, when you switch your loan during the first few years when the outstanding principal amount is high, you benefit from repaying the loan at a lower interest rate and thereby reducing the principal amount faster.
- The property is approved by the new lender
One of the important factors you must check in advance before initiating the home loan balance transfer is if your property is approved by the new lender. Each lender has different procedures and approval lists.
However, in most cases, the lender may approve the property if it is undisputed and built by a reputed builder. If the new lender approves the property and offers lower interest, you can switch your home loan.
A home loan balance transfer is an excellent facility that allows you to reduce your repayment burden and be debt-free faster. However, do your due diligence and consider the above factors to get the maximum benefit from your move to transfer the loan.