The Collateral World of Mortgaging Property
January 21, 2022
January 10, 2022
Are you drained from paying higher interest rates on your home loan that you availed of years ago? Looking forward to steadily reducing interest rates can make you repent about the decision you made earlier.
Well, you don’t have to worry about the high interest rates as with balance transfer loans you can enjoy the benefits of lower interest rates set by the Reserve Bank of India. The home loan balance transfer charges RBI guidelines determine the new interest rates, and the existing borrower can avail oneself of by switching to other lender offering lower interest rates.
Yet confused? And if you want to know about the procedure and benefits then Urban Money have got everything covered in this in-depth balance transfer loans guide.
Banks and financial institutions offer home loans at distinct interest rates and the key reason is long tenure. A long repayment period comes with a higher interest amount. The longer the tenure, the more will be payable EMIs, and more will be the home loan interest. So, if you get the opportunity to access a lower interest rate, never let it slide out of your hands.
When a home loan applicant transfers his loan account from a precursory lender to another, it is labelled as a home loan balance transfer. Well, the borrower doesn’t have to baffle with the procedure as it is alike to procuring a home loan. When you count on balance transfer loans, the outstanding amount is transferred to the new lender with a new home loan account.
The new lenders pay off the amount to the previous lender to close the existing home loan account. After final closure, the borrower will start paying the monthly EMIs with new interest rates to the new lender. The best part about balance transfer is you save a lot on monthly EMIs and overall payable amount.
People usually consider home loan balance transfer when they are servicing their home loans at higher rates. When borrowers find another lender with a competitive rate of interest, they readily believe in switching to another lender. To offer the benefit of a balance transfer to the borrowers, the lender again performs the documentation procedure. Successful submission and approval of essential documents, the lender pays the remaining loan amount in full. Next to this, the borrower starts the repayment of the transferred home loan to the new lender.
With diverse banks offering housing loans at interest rates ranging from 6.90% to 7.85%, count on transferring the mortgage loans and save a specific amount on every interest paid.
After having basic information about balance transfer loans, the next important aspect you should know about is how it adds to your overall savings. Yes!! You read that right. Balance transfer loans can add to huge, saved amounts with reduced EMIs. With lower interest rates, the overall monthly payable amount gets reduced and the amount you save by relying on a home loan balance transfer.
The amount usually depends upon the existing interest rate. The more the difference in older and new interest rates, the more will be the saving. The core reason behind such a significant difference is the changed RBI policies and the enhanced credit score of the borrower.
Nonetheless, before availing of a balance transfer, know about the involved charges. The new bank and lender do charge processing fees as they have to carry out the whole procedure once again including documentation. Whereas the existing lender might charge the pre-closure fee depending upon the agreed terms and conditions.
Before applying for a home loan balance transfer, we recommend considering the below-mentioned things as they will give you a clear idea about your eligibility for a balance transfer. Also, you should opt for transfers in the initial years when you are paying more interest component than the principal component.
The balance transfer of a home loan somehow depends upon the borrower’s credit score. A borrower with a bad credit score, won’t be eligible to access a home loan at the lower interest rate. At the same time with a good credit score, borrowers will be able to avail of home loan transfers at a reduced rate of interest. In the repayment tenure, if you failed to make timely payments, then it would have also generated a negative impact on your credit score.
So, look over your present credit score, to know if you are eligible for a balance transfer with lower interest rates or not. New lending institutions initially consider the credit score and repayment history before jumping to the documentation and approval part.
In general, banks and financial institutions charge prepayment penalties to cover the incurred pre-closure loss. So before applying for a balance transfer know the amount you will have to pay as a penalty. If the amount is almost equal to the savings you will generate with the balance transfer, then drop the idea. As per the recent RBI regulations, the housing finance companies/ banks don’t have permission to levy any fore-closure penalties. So, get in touch with the dedicated department and ensure that you don’t pay too much in penalties.
Prior to accepting the balance transfer, go through the terms and conditions. Look for the hidden charges (if any). Additionally, in advance ask the lender about the processing fee to compute what estimate you will have to pay for loan transfer.
It is not preferable to choose a balance transfer if you have a repayment tenure of fewer than five years. You have already paid the maximum interest component by the time and left with the principal component. So, if you even opt for a loan transfer, you will not save much and will end up paying huge in terms of foreclosure and processing fees.
Home loans encompass large repayment amounts, and the interest rate can be very steep. As per a rough estimate, the borrowers pay 2.5 times the availed amount in a twenty-year term. For instance, if you borrow INR 1 crore as a home loan, then you will end up paying 2.5 crores with higher interest rates over 20 years.
Even a minute drop of 0.5% rate of interest can result in a huge difference in the outgo. One way to reduce the rate of interest is by checking with the current lender. Have words about the new RBI rates, improved credit score, and propose reduced loan interest rates. If they refuse to do the same, then look for lenders offering competitive interest rates. So, let’s have a rundown of how choosing a home loan transfer benefits you in certain ways.
A lower rate of interest put forward than the previous one is a key indicator to count on shifting the loan to a new finance provider. Typically, borrowers avail loans with floating rates, which makes them linked to the macro environment. Whenever the rate of interest falls, lenders have the power to limit the benefit of fluctuating interest rates to the loan borrowers. So, even with the floating interest rate, you may fail to enjoy the benefits of lower rates.
In such situations, relying on balance transfer with the lender proffering a preferable interest rate is advisable. As a consequence, you will have to pay a reduced monthly installment with the benefit of a lower interest rate. The decrease in monthly installments makes housing finance more borrower friendly. For a better understanding, let us go through two elementary scenarios:
Scenario 1: Person A takes a housing loan of INR 50 lakh with 20 years repayment tenure at a 10% interest rate. The payable monthly EMI will be INR 48,251 whereas the total repayment amount will be INR 65 lakh.
Scenario 2: After 3 years of loan tenure, person A decides to reduce the EMI amount because of increased expenditure. So, he counted on home loan balance transfer and chose a lender offering an 8.75% rate of interest. Till this time the remaining balance is INR 45 lakh whereas the remaining repayment tenure is 17 years. With a new lender and lower interest rate, your monthly EMIs will be reduced to INR 42,457. Additionally, the interest outgo will reduce to INR 42 lakh. This shows that a minute reduction of 1.25% interest rate can result in saving up to INR 23 lakh.
When you apply for a home loan, you have two options. One is a fixed interest rate and the other is a floating interest rate. In the case of fixed rates, the interest rate remains static regardless of the RBI schemes and changing market trends. The borrower gets the chance to lock the rate of interest based upon the ideal budget. Whereas, when you rely on floating rate home loans, the lenders offer adjustable interest rates as per market fluctuations and new RBI charges.
There can be a situation where the borrower is under a fixed interest rate package and the market is facing a continuous reduction in rate. In this scenario, the borrower might think about shifting to a floating rate of interest. Contrarily, if borrowers have availed of home loans with floating rates and the market trend depicts continuous skyrocketing of an interest rate for a long period then shifting to a fixed rate is advisable.
A top-up loan is an additional finance that the lender sanctions with a home loan balance transfer on the request of the borrower over the home loan. At the time of balance transfer, borrowers have a flexible option of borrowing a certain amount of money at the underlying rates.
Procuring a loan top-up is effortless when opted for while shifting a home loan balance. It is easily accessible at the time of balance transfer and can be used for diverse purposes such as personal use, to change the existing interior or in education, and many more. Well, the amount for a top-up loan is somewhat limited to 25% of the loan principal amount. The best part is, at the time of balance transfer, the top-up loan is sanctioned at lower rates.
For example, five years ago Person B availed a housing loan of INR 60 lakh to purchase a 1 crore property. After timely repayment of EMIs for ten years, the loan value got reduced to INR 40 lakh. However, meanwhile, the real estate rate of the property increased and now it is worth INR 1.5 crore. In this scenario, Person B can opt for a loan refinance from another bank and repay this outstanding amount at lower interest rates. Additionally, he can get additional funding of INR 50 lakhs based upon the current market value of the property at the underlying interest rate.
Borrowers consider balance transfer as a better lending solution because it can be easily accessed yet affordable. Moreover, never go for a top-up loan only if required and is available at lower rates.
Bad customer service such as delays in the issue of home loan payment records or other issues can affect the image of the home loan lender. If you are unsatisfied with the current lender, there is always an option to transfer your home loan to another lender.
A home loan is typically a long-term commitment and can go up to 30 years, hence, if there is any sense of dissatisfaction then it will be very difficult for any borrower to maintain a long-term relationship with the lender. In such cases, one can switch the lender to enjoy better customer service.
Just transferring the home loan based upon the interest rate won’t help. Before jumping to any final decision, you have to know about the current bank’s interest rate policy, foreclosure charges, ongoing schemes, and your remaining loan tenure. All these factors act as an external benchmark and as per 2019 RBI guidelines, every bank has to link the floating rate of interest with an external benchmark. With this course of action, the borrower has a better understanding of the rising and falling interest rates. Based upon the changing rate trend, opt for balance transfer loans.
Let say you are having 20 years of loan tenure, then consider balance transfer when you are left with at least 10 to 15 years of repayment. Additionally, there must be a difference of 25-50 basis points amidst the existing and new banks. This is crucial because, in the initial repayment tenure, you pay more from the interest component.
After going through the plus points of a balance transfer, we can say choosing a home loan balance transfer is the best way to enjoy certain benefits including lower interest rates. All you need to take care of is the incurred charges and the remaining repayment tenure. The rest of the things get on track when you examine and make a rough estimate of what you will pay and how much you will save. You need to be cautious as any wrong step can make you end up paying a lot more. But never forget before counting on refinance, try to negotiate with the current lender. If things don’t go in your court, finalize your decision of balance transfer with the chosen lender.