As per recent data from National Automated Clearing House, better known as NACH, around 41% of auto-debit transactions failed in September. While this indicates a depleting fund availability among Indians, such a decline can be due to the current economic condition that has restricted fund access for many. Thus, now more than ever, individuals need to streamline their finances, whereby availing a refinancing facility for high-value advances like home loans can help save money through reduced interest rates.
Such a refinancing facility allows an existing borrower to transfer his/her home loan balance from one lender to another lending institution that offers favourable service terms and rates. There are several ways in which home loan balance transfer can be advantageous during the current economic scenario. Some of them include –
- After home loan balance transfer, borrowers will pay a lower monthly instalment amount on a home loan. It will enable them to repay the loan in time.
- Reduced EMIs will increase one’s cash flow, which can be used to make part-prepayments towards the principal amount, thus reducing the financial burden.
- Borrowers can avail additional financing such as top-up loan when they opt for home loan refinancing to address their diverse funding needs.
- One can also avail better customer service after a balance transfer on current home loan.
Factors to consider when availing the refinancing facility
However, to fully utilise the benefits mentioned above, borrowers must consider the following factors before opting for a home loan balance transfer –
- The ideal time for balance transfer –
The most important factor that a borrower must consider is the timing when they should do a home loan balance transfer. In case of secured credits like home loans that come with long tenures, the interest component is greater than the principal portion during the initial years. Subsequently, in the later years, the principal component exceeds the interest portion.
Thus, to avail the benefits of reduced interest rate, borrowers should opt for a balance transfer during the initial years. For instance, A has availed a home loan of Rs.30 lakh at 9.5% interest rate for a tenure of 15 years. Now, after 3 years, his outstanding loan amount is Rs.27 lakh.
Now he arrives at a loan offer from another lending institution extending the advance at a much lower interest rate of 6.90%. If he refinances his loan now, which is still at its initial stage, he will save around Rs.4,076 in EMI repayment and Rs.7,33,753 in total cash outflow.
- Difference in interest
Borrowers should only consider opting for a home loan balance transfer when there is a substantial difference in interest rate being offered by your existing and the new lender.
This can be calculated through customised tools such as home loan transfer calculator. The following information should be entered to calculate the difference amount –
- Name of the existing lender.
- Location of property.
- Loan starting year and month.
- Total principal outstanding.
- Current repayment tenure.
- Current rate of interest.
- Rate of interest for new lending institutions.
Besides interest rate, one also needs to consider other additional fees applicable during home loan balance transfer which can increase the overall cost of the loan. It includes expenses such as foreclosure fees, loan processing fees, documentation charges, stamp duty, and the like.
Thus, borrowers should opt for a home loan balance transfer only if there is a scope for substantial savings after the addition of all associated charges on the loan amount.
- Benchmark rate
Borrowers should also check the benchmark rate to which the interest rate on a home loan is linked. For instance, if you are paying home loans at MCLR-linked interest rate, you can opt for a balance transfer to avail loan at repo rate-linked interest rate to avail the benefits of repo rate cuts.
Before knowing the steps to apply for a home loan balance transfer, one must go through the eligibility criteria specified by the new lending institution to ensure that he/she has met all the requirements. Some of the basic parameters that lenders require during balance transfer are as follows –
- Borrowers must have paid more than 12 monthly instalments on a home loan to their existing lender.
- They must not have any outstanding dues on a home loan.
- The property should be ready for possession or be occupied already at the time of balance transfer.
Borrowers can also consider opting for balance transfer from NBFCs that extend pre-approved offers on home loans for a hassle-free and quick processing of loan application.
Such offers can also be availed on other secured credits such as loans against property. Individuals can easily check their pre-approved offers by entering only nominal information such as their name and contact information.
Besides eligibility criteria, individuals should also keep all the documents required for home loan balance transfer handy. They can include NOC or no objection certificate, KYC documents, proof of income, property documents and any other document stated by the new lender.