Opting for a home loan balance transfer is a great strategy to shift your existing home loan to another lender offering better rates and terms. When initiating a home loan balance transfer, you have the option to choose between a fixed interest rate and a floating interest rate.
This choice is pivotal as it influences your EMIs. Both types of interest rates have distinct advantages, making it imperative to understand the distinction between them. This will help you choose an interest rate that aligns with your financial objectives.
The interest rate that you choose also influences the home loan transfer charges. This includes the prepayment or foreclosure charges that you need to pay if you choose to close your loan early.
Read on to learn the advantages of fixed and variable interest rates and which option is the best for a home loan balance transfer.
What are Fixed and Variable Home Loan Interest Rates?
A fixed interest rate remains constant during the entire duration of your home loan. A significant advantage of a fixed interest rate is that even if market conditions experience fluctuations, the interest rate remains constant.
On the other hand, a variable or a floating interest rate is subject to market fluctuations. If you choose a floating rate, you pay a base interest rate coupled with a variable component. The base rate represents the minimum interest rate benchmark, and financial institutions cannot offer rates lower than this benchmark.
Hence, any changes in the base rate result in variations in the floating rate. Check out the benefits you get when you choose fixed interest rates for a home loan balance transfer.
1. Rates Remain Steady
You get to enjoy constant rates when you opt for a home loan balance transfer with a fixed interest rate. The interest rate does not fluctuate with market volatility throughout the duration of your loan.
2. Home Loan EMIs Do Not Change
Another major benefit of choosing a fixed interest rate for your balance transfer is that your monthly instalments remain steady. This is beneficial when calculating the monthly EMI for your loan, as you can easily plan your repayment structure.
3. Facilitates Better Financial Planning
With a fixed interest rate for your home loan balance transfer, you can plan your finances better. This is because you pay a steady monthly instalment every month towards your loan. This enables you to plan your income and expenses efficiently.
Here are the perks you stand to enjoy when you choose variable interest rates.
1. Minimised Loan Costs
A significant benefit of opting for variable or floating interest rates for your home loan balance transfer is that you can reduce your borrowing costs. When interest rates decrease due to market fluctuations, it can lead to substantial savings on your interest payments.
2. Comparatively Lower Rates
Variable interest rates tend to be lower than fixed interest rates. This is to account for the fact that these rates could go up and surpass fixed rates. So, locking a low rate at the start can help you save more during the early years of your tenure.
3. No Charges for Early Repayment
This is yet another benefit of opting for variable interest rates for your home loan balance transfer. You do not need to pay any prepayment penalties or foreclosure charges if you plan to close your home loan before the stipulated timeline.
However, the home loan transfer charges, such as processing fees, may vary with various lenders. So, check with the lender before initiating a home loan balance transfer to avoid paying additional charges.
Which Type of Interest Rate is Suitable for a Home Loan Balance Transfer?
Choosing between a fixed or a variable interest rate for a home loan balance transfer is a crucial decision that demands caution. You must assess your finances, risk tolerance, and the market conditions before deciding.
Here are some situations when choosing a fixed interest rate is ideal.
1. Affordable EMI Options
You can choose a fixed home loan interest rate if the lender offers cost-effective borrowing options. Assess your finances and see if the EMI is affordable since you must pay it until the loan tenure ends.
You can use an EMI calculator to compute your monthly instalment before making any decision. This helps you repay the loan effortlessly without overburdening your finances.
2. Expected Increase in Rates
Choosing a fixed rate is also a smart decision when you foresee a potential increase in interest rates in the future. Here, you can keep your loan affordable at the current interest rate, and opt for the floating type when the rates drop a lot by initiating a home loan balance transfer.
3. Decline in Interest Rates
Another situation when you can opt for a fixed rate is when interest rates have declined and the current rates are favourable.
When Should One opt for Variable Interest Rate?
Know the situations wherein choosing a variable interest rate is ideal.
1. Expected Decrease in Rates
If you anticipate a decrease in home loan interest rates, choose the floating rate option. This can lead to a significant reduction in the overall cost of your loan as it minimises your interest outgo.
2. Planning to Prepay Your Loan
The interest rate that you choose also influences the home loan transfer charges. If you plan to prepay your home loan and close it before the tenure ends, then you must choose a variable rate.
This is because certain home loan transfer charges, like the prepayment penalty, are nil for a floating rate loan. However, check with your lender since these charges can vary from one lending institution to the other.
What are the Eligibility Criteria and Document Requirements for a Home Loan Balance Transfer?
Here are some common home loan transfer eligibility criteria and document requirements most lenders set. These terms can vary from one lender to another, so check with your lender before initiating a home loan balance transfer.
Some common eligibility criteria that you need to meet for a home loan balance transfer include:
● You must be an Indian citizen
● You must be between 23 and 65 years old
● You must be residing in the property or be ready to occupy it
● You must have completed a minimum of 12 EMIs with your current lender
● You can apply if you are a self-employed professional or a salaried individual
Check out the documents to submit for a home loan balance transfer:
● Identity Proof: Aadhaar card / PAN card / Voters ID / Driving licence / Job card issued by NREGA
● Address Proof: Aadhaar card / PAN card / Voters ID / Driving licence
● Financial Documents: Form 16, latest salary slips, and bank statements for the last 6 months
● Property Documents: Property purchase or ownership documents, NOC from your housing society or developer, and registration and stamp duty payments
● Current Home Loan Documents: Loan sanction letter or agreement with the current lender, approvals from your current lender, and home loan statement to date
Choosing the best type of interest rate for a home loan balance transfer is tricky. It depends on your financial situation and preferences, and you need to consider these factors. To make a smart financial decision that meets your goals, stay informed about the interest rates and changes in the market.
Moneycontrol Journalists are not involved in creation of this article.
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