Opting for a home loan balance transfer can help in effective debt management. Instead of paying high interest to your existing lender, you can switch to a lender offering cheaper rates. This saves you money on EMIs and reduces your overall debt obligation.
A key factor to consider before transferring your loan is its residual tenure. The profitability of transferring your loan depends entirely on it. A transfer toward the end of the loan tenure means that the home loan balance transfer charges will nullify any interest savings you make.
Apart from tenure, interest rates and transfer charges greatly impact the feasibility of transferring your home loan. Keep reading to know more.
Role of Tenure When Availing a Home Loan Balance Transfer
A home loan can be of two types, short-term or long-term. Here is how tenure impacts these loans:
A short-term home loan is characterised by a tenure usually less than 5 years. Due to this, the interest rates are slightly higher, but the overall interest cost is lower. The EMI amounts are heftier, but the proportion of interest in an EMI payout is lesser.
This means that you are paying off the principal loan amount faster. In the initial years, your EMIs will cover more of the interest component; hence transferring after paying EMIs for 1-2 years is not a wise move. Additionally, there is a high chance that the home loan balance transfer charges will actually exceed any savings from a reduced interest rate.
Loans with tenures ranging from 5 to 30 years are classified as long-term loans. These charge lower rates of interest, with EMI amounts being far more affordable. However, the total interest cost is higher, owing to the fact that interest is levied for longer periods.
In this case, a transfer is advisable only if the loan is in its early years. Else, you will end up paying the interest on a higher outstanding, and then proceed to transfer your loan when the EMI starts covering more principal than interest.
This diminishes the cost-saving of a home loan balance transfer. The home loan balance transfer charges will also outweigh any interest savings in the last few years of the loan.
Before initiating a home loan balance transfer, make sure to try renegotiating the terms with your existing lender. Sometimes they will agree to match reduced rates offered by other lenders to retain you as a customer.
Finally, keep in mind the role of a credit score. For one, a good score encourages lenders to offer you lower rates. Secondly, multiple inquiries by lenders will temporarily reduce your credit score, and nullify any gains you made over the last few months.
Top Factors Affecting Home Loan Balance Transfer
Three factors influence the actual cost savings associated with a home loan balance transfer, namely:
- Residual Tenure: The number of years remaining is crucial to discern the profitability of making a switch. Simply put, a longer residual tenure leads to effective savings.
- Floating Rate vs. Fixed Rate: Many lenders advertise low interest rates, only later revealed as “starting rates”. This is most likely the case with a floating interest rate. It is likely that the rate will catch up to your current rate in a matter of time.
However, if a lender offers a substantially lower fixed interest rate, you stand to save a lot by opting a transfer.
- Home Loan Balance Transfer Charges: Most lenders charge prepayment penalties for early loan closures. Add to this processing charges, application fees, administration charges, inspection fees and more with your new lender.
A transfer should still save you money after accounting for all these charges.
Overall Savings Calculation
Once you decide to go ahead with a home loan transfer, do a cost-benefit analysis, and carefully consider the implications.
With a longer residual tenure, the home loan balance transfer charges get offset by interest savings. Hence, for a long-term loan, a switch is suitable if it is early in the tenure and you get a low fixed rate of interest.
With a shorter residual tenure, chances are that the home loan balance transfer charges will negate the expected interest savings. Hence, for a short-term loan, a home loan balance transfer is not advisable. Instead, consider negotiating with your lender for a lower rate.
Are You Eligible for a Home Loan Balance Transfer?
While the parameters differ from vendor to vendor, the common criteria for home loan balance transfer eligibility include:
- Indian citizenship
- Age between 23-65 years
- Salaried or self-employed professional with a stable income
- Living in your property or ready to occupy it
- Satisfactory property valuation
- Minimum 12 EMIs paid off with your existing lender
- No outstanding amount due with your existing lender
In conclusion, remember that you can’t opt for a home loan balance transfer every time a lender offers a low rate. Apart from impacting your credit profile, the charges payable each time will undermine the benefits.
Lenders also impose a lock-in period of 6 months to 1 year before you can transfer your loan. To ensure your home loan balance transfer does end up saving costs, keep the opportunity costs in mind while calculating.
Check how it impacts your financial plan and shop around for options before choosing. A final tip is to research the new lender’s credentials before investing. If a lender has a history of upping the rates or offering teaser rates, reconsider the transfer.