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Home loan transfer: Factors to consider before shifting lenders

Falling interest rates on home loans have prompted many borrowers to shift lenders. Here are some key factors to consider before doing so

January 07, 2021 / 11:21 AM IST

Banks and housing finance companies (HFCs) have been able to offer home loans at rates starting from 6.75-6.9 percent a year. Existing home loan borrowers servicing their home loans at much higher interest rates may consider transferring their home loans to other lenders at lower interest rates and/or better service terms. However, the decision of switching your existing home loan to another lender has to be a well-thought-out one after considering some key factors.

 Overall savings in interest cost

In most cases, the primary objective behind opting for a home loan balance transfer is reduction in the overall interest cost on the outstanding home loan amount. Availing the balance transfer option is especially helpful for existing borrowers who initially took the loan at higher interest and are now eligible for a much lower rates owing to their improved credit profiles. The lower interest rate availed on exercising home loan balance transfer (HLBT) results in reduced overall interest pay-out on your existing home loan, without impacting your liquidity and existing investments.

However, before switching to another lender, remember that your balance transfer request will be considered as fresh home loan application by the new lender and, hence, attract processing fee, administrative and other charges levied at the time of processing of new home loan applications. This makes it crucial for you to calculate the overall savings in interest cost after factoring in such charges. Go ahead with the balance transfer option only if the overall interest saving is significant enough after factoring in the costs involved.

Additionally, while opting for HLBT, borrowers can consider the home loan overdraft option, a home loan variant, if offered by the new lender. In this option, an overdraft account in the form of a savings or current account is opened and linked with the home loan account. The borrowers can deposit their surplus funds in the overdraft account and later withdraw from it in case of urgent needs. The balance of this overdraft account is deducted from the outstanding loan amount while calculating the interest component, which will further reduce the interest cost. This home loan variant allows borrowers to avail the benefit of making prepayments while conserving their liquidity.


Scope of renegotiation with existing lender

Before applying for a home loan balance transfer, try to negotiate with your existing lender regarding the interest rate and/or other terms and considerations. If your existing lender refuses to accept your request for reducing the interest rate and/or providing better terms of service, you can go ahead with switching your lender by opting for HLBT. Keep in mind that when you apply for balance transfer, the new institution would impose its own set of terms and conditions on the transferred loan. Before you finalize the new terms, you can also use the balance transfer to either avail a larger loan amount in the form of top-up loan, or reset your loan tenure.

Also read: Still paying high interest on your home loan? Switch banks for lower EMIs

Residual loan tenure

It’s generally not advisable to opt for home loan balance transfer during the later stages of the tenure, as borrowers must have paid the majority part of their interest component during the earlier stages of the tenure itself. This implies relatively lower scope of significant overall interest cost savings during later stages.

For example, if you transfer an outstanding home loan of Rs 50 lakh with a current interest rate of 8.5 percent annually and residual tenure of 20 years to another bank offering 7.25 percent a year for the same tenure, you will get total savings of close to Rs 9.29 lakh over the entire tenure. On the other hand, if you transfer the home loan with the same outstanding loan amount but with residual tenure of five years to another lender at 7.25 percent, your total savings would be just Rs 1.79 lakh.

Irrespective of the stage of the loan tenure, try to keep the tenure upon switching lender the same as the remaining tenure of your existing home loan. This saves you from the burden of paying increased interest cost, which you would have paid in case you opted for a longer tenure than the original residual tenure of the transferred home loan. Opt for an increased tenure only if you wish to reduce your EMI burden along with balance transfer. However, as longer tenure implies higher overall interest cost, try to prepay loan whenever you have surplus funds.
Ratan Chaudhary is Head of Home Loans,
first published: Jan 7, 2021 09:47 am

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