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25 September 2020

Is Switching Home Loan Good for You or Not? Know Here

According to the Reserve Bank of India, the total outstanding balance in the home loan segment amounts to Rs.13.3 lakh crore, as of April 2020. Over the past two decades, housing finance has gained considerable currency among aspiring homeowners in India.

However, the current economic slump continuing since February 2019 has moderated the growth rate in this segment. This situation has been a point of concern for both RBI and GOI, prompting several remedial measures. The most pronounced of these measures are the cuts in the repo rate.
  1. Since 2019, the Reserve Bank of India has slashed the repo rate by 250 bps
  2. Repo rate has been reduced from 6.5% to 4%
These cuts have translated to financial institutions bringing down the rates on home loans to a 15-year low. Naturally, scores of existing housing credit borrowers are now opting for a home loan balance transfer to benefit from such recent developments.

What is a home loan switch?

A balance transfer involves a borrower transferring the outstanding home loan amount from his/her existing lender to a new financial institution. In this process, a new lender repays the current housing financier this balance amount, following which a borrower shall forward EMIs to the former.

One of the primary reasons to refinance a home loan is to reduce the EMI burden. Thus, individuals carry out a home loan balance transfer when a new financial institution offers lower interest rates compared to the existing lender. Nevertheless, it would help if you considered a range of factors alongside interest rate to ensure you stand to benefit from a balance transfer.

What factors to consider before a home loan balance transfer?

The primary considerations to make before opting for a home loan balance transfer are:

Timing of balance transfer

Home loans are long-term financial commitments with repayment tenor ranging up to 20 years. In general, EMIs comprises both principal and interest. However, their distribution varies across the tenor, which you can understand from an amortisation schedule.

During the initial period, monthly instalments primarily constitute the interest portion. Thus, you can see in the first few years, principal repaid is significantly less compared to total interest outgo. Eventually, this distribution evens out. In the later years, the principal portion is more significant in EMIs.

Thus, timing is essential to determine whether a loan switch will prove beneficial. If you are nearing the end of loan tenure, a balance transfer may not be profitable. That is because you have already paid a considerable portion of the total interest.

On the other hand, if your home loan is in its initial stages of repayment, you can stand to save on the interest outgo significantly. It is one of the things you should know about home loan balance transfer.

Differences in interest rates

Home loans are long-term affairs, and interest calculation is spread across a considerably more extended period. Therefore, even a marginal variation in rates of interest can lead to a significant difference in the interest outgo.

For instance, consider a home loan of Rs.50 lakh with an interest rate of 10% for a repayment tenor of 20 years. In this case, a borrower’s total interest payable would be Rs.6580260.

If the interest rate is lowered by only 0.5%, i.e. 9.5%, an individual would have to incur an interest outgo of Rs.6185574. Thus, a mere reduction of 0.5% in rate results in savings of nearly Rs.4 lakh.

However, a difference below a specific level may not yield any profit for the borrower. That’s because a balance transfer involves an array of costs and charges, like processing fee, foreclosure charges, etc.

According to financial experts, an individual should opt for a home loan refinance if a new lender is offering it at an interest rate that is at least 50 bps (100 bps = 1%) lower. In case the remaining loan tenor is less than 10 years, experts recommend the new interest rate should be less by at least 75 bps.

That is how you can reduce EMIs with a home loan balance transfer. You can utilise a home loan balance transfer calculator to ensure accurate cost-profit analysis.

Nevertheless, before deciding to refinance your home loan, you might ensure the following:

Negotiate with the existing lender – You may want to negotiate with your current lender regarding the interest rates. If you are on good terms with the local branch and your repayment history is impeccable, a lender might consider lowering the rate of interest.

Verify eligibility – Ensure that you are eligible for a home loan balance transfer before opting for one. Check your credit score to ascertain whether you qualify with the new lender for a home loan.

Check for balance transfer benefits – A few housing financiers provide the option of a home loan top up with a home loan balance transfer. These options can allow you to optimise your benefits. Thus, you may want to check for such balance transfer benefits before locking in on a lender.

Look for financial institutions that provide pre-approved offers on loans to expedite and simplify the process of availing a loan. These offers apply to home loans, loans against property, etc. and numerous other financial products and services. You can check your pre-approved offer by providing your name and phone number.

Assess the factors and considerations mentioned above to determine whether a home loan balance transfer would benefit your finances or not.

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