From time to time bank interest rates and loan rates are modified by banks and other financial institutions. This may be due to a change in their internal policies, market conditions or modifications made by the Central Bank in the base rates. Home loans usually run for long times so it is likely that that during the course of the loan duration the lending rates may change often. Of course if the rates are increased you as a borrower will not be worried but if the loan rates are dropped and you are stuck with an expensive loan then you as a borrower may feel cheated. In September last year most banks lowered the home loans interest rates. In such a situation a loan balance transfer may help you.
What is Balance Transfer of a Loan?
A home loan balance transfer is a process whereby a borrower transfers the loan which essentially means the unpaid principal from an existing lender to another lender. This transfer is done to take advantage of lower interest rates that are offered by the new lender.
To put it in another words balance transfer is an option available to borrowers to move a high interest loan in an existing bank to another bank which is offering loans at a lower interest. Obviously even small change also in the interest can also offer huge benefits to a lender.
In this process the unpaid principal amount is transferred to the new bank, the bank taking up the loan pay the due amount to the existing bank. The customer then continues to pay the new bank, EMIs at the new reduced rates.
How Does Balance Transfer Help You?
Obviously a borrower will not switch a loan ever time the interest rates drop. They will make this decision after considering a lot of factors. Just let us take an example to see how a change in rates can benefit a person.
For a loan of Rs 25,00,000 where there are 15 years remaining @ 10,25% interest the EMI works out to be Rs. 27,249 and an yearly expenditure of Rs. 326,988 and a total of Rs. 24,04,779. If the rate drops half a percent to 9.75%, the EMI would be Rs. 26,484, yearly outflow 317,808 and the total out over 15 years would be Rs. 22,67,132.
The above example shows how just a half percent change could impact the yearly outflow and the total interest one has to pay. So a balance transfer can help you in saving money; one could use an online home loans calculator to calculate the total expected savings.
However having said that; one needs to consider a few factors before opting for a balance transfer of a loan. These factors are:
- Remaining Tenure and Outstanding Principal: A balance transfer makes sense if the outstanding principal amount is high and the remaining loan tenure is considerable. A longer loan tenure and a bigger principal means more savings from a loan transfer which will ensure that the cost incurred in making the balance transfer is amortized over the years. Thus obviously it will more sense to transfer your loan in the initial loan period.
- Cost Involved versus Savings: Savings are obviously in the form of lesser interest you pay on your loan. However there is cost involved too; the bank that is taking over the loan will charge a processing fee, there will be stamp duty charges etc. The pre-payment penalty has been waived off so that cost is saved and plus the time and effort involved should be taken into account. This tangible and intangible cost must be compared with the savings to reach a decision.
- CIBIL Score: The bank that takes over the loan will do so only if the borrower meets the eligibility criteria which include a good CIBIL score. So before opting for a loan transfer make sure that you do a credit check to see if you are credit healthy.
Existing borrowers could also negotiate with the current bank to offer them a lower interest if that is the market trend. Banks may be willing to do since they do not want to lose customers and customers can also benefit without having to go through a hassle of balance transfer.
Can a Home Loan Transfer Benefit You?
Now we come to the crucial question. Can a home loan transfer benefit you? There is no clear yes or no answer to this. A home loan transfer can benefit you only in certain conditions; even if a bank offers lower interest rate it may not be a economically viable to transfer a home loan if the savings are not enough to justify the time, effort and cost. Following factors contribute to the decision making when considering whether to transfer a home loan