Home Loan Balance Transfer: 3 scenarios where it can benefit you

Many banks and housing finance companies (HFCs) are currently offering home loans with interest rates starting as low as 8.3% per annum. With such lucrative rates on offer, not only would prospective home loan applicants be tempted towards availing a home loan, even the existing borrowers may scout for balance transfer opportunities to lower their interest cost and/or better service terms.

If you are among the existing home loan borrowers contemplating balance transfer, have a look at three scenarios wherein switching your home loan lender can be beneficial for you:

1. Substantial savings in overall interest cost

The primary aim behind most home loan balance transfers is to reduce the overall interest cost for existing home loan borrowers, especially those who availed a home loan at much higher interest rate. The balance transfer option is especially beneficial for those who can now avail home loans at lower interest rates due to improved credit profile.

As balance transfer is considered as a fresh home loan application by the new lender, processing fee, administrative charges and other charges are usually levied by the new lender at the time of processing the home loan balance transfer application. Hence, go ahead with the balance transfer option only if the overall saving in interest cost is significant enough after factoring in the associated cost.

Existing home loan borrowers applying for the balance transfer option can also consider the home loan overdraft option, a home loan variant, if offered by the new lender. An overdraft account is opened under the home loan overdraft option in the form of a savings or current account, and linked with the new home loan account. Borrowers can deposit surplus funds in this overdraft account and withdraw from it, if required. As the balance maintained in the overdraft account is deducted from the outstanding loan amount while calculating the interest of home loan, it results in the reduction of the interest cost for the borrower. Hence, it allows home loan borrowers to avail the benefit of prepaying loan without compromising on liquidity.

Also Read: Home Loan Overdraft Facility: Should you opt for it?

2. Transferring loan during its initial years

Opting for home loan balance transfer during the later stages of the loan tenure does not lead to significant savings in the interest cost as borrowers pay a major chunk of their interest component during the initial stages of the loan tenure.

Borrowers should try to keep the tenure of their transferred home loan same as the residual tenure of their existing home loans as a longer repayment tenure increases the interest cost. Only those seeking significant reduction in the EMI burden should opt for a longer repayment tenure for transferred loan. Such borrowers should aim to lower their overall interest cost by making prepayments later on, whenever they have surplus funds.

3. Top-up loan requirement not met by existing lender

Existing home loan borrowers may require additional funds during the home loan tenure for home renovation, child’s higher education, debt consolidation, medical emergencies, car purchase, etc. To meet such credit demand, lenders offer top-up home loans to existing borrowers. Just like personal loans, top-up home loans do not come with any restriction on the usage of loan proceeds, except for speculation. Its interest rate is usually the same as that of the underlying home loan, or a notch higher. This makes top-up home loans one of the cheapest sources of credit for the existing home loan borrowers.

However, lenders usually require existing borrowers to have a consistent repayment record and repay a minimum number of EMIs of the existing home loan to avail a top-up home loan. Many home loan lenders have also started offering top-up home loans to those transferring their existing home loans. Borrowers can switch to another lender offering a top-up loan if their existing lender rejects their application or offers inadequate top-up loan at a much higher interest rate.