- Date : 21/10/2020
- Read: 6 mins
A home loan transfer makes sense only when the difference is big enough to save money, both in the short term (processing fees) and long term (interest and prepayment charges).
Thinking of transferring your home loan to a different financial institution? Any measure that can help you reduce your monthly outgo can definitely seem worthwhile you in times of financial slowdown. This is especially true if the interest rate on your existing home loan remains high when compared to those being offered to new customers.
If you have tried to negotiate a lower home loan interest rate and failed, balance transfer could be an option. Here’s how to check if you can benefit from it. Let's assume you have an outstanding home loan of Rs 20 lacs on which you pay 8.50% interest. Over a repayment period of 12 years, you can save up to Rs 1,56,056, even after accounting for balance transfer fees, by switching to a new provider offering a rate of interest of 7%
When to transfer a home loan
There are a few things to remember when transferring your home loan. Non-banking finance companies (NBFCs) decide their own rates, depending on the cost they incur on borrowing funds and the margin they wish to make. This means you may not get the full benefit of the multiple rate cuts announced by the RBI in the past 12 months.
Another common situation where a home loan balance transfer is advisable is if you have a fixed rate home loan and want to switch to a cheaper flexible rate loan. Apart from a lower rate of interest, waivers on prepayment charges or processing fees can also make a housing loan balance transfer attractive.
All said, a home loan transfer only makes sense when the difference is big enough to save money, both in the short term (processing fees) and the long term (interest, prepayment charges). EMIs are typically lower on long-term loans. If you intend to sell the property you bought with a home loan in the near future – or if there are only a few more EMIs remaining – a balance transfer may not help you much. This is because of the extra charges you may have to pay upfront (such as prepayment and/or processing charges).
The home loan balance transfer process
If you are keen to transfer your home loan, here’s a checklist you can follow:
- Compare the existing interest rates to determine if there is a potential for saving money
- Check for prepayment fees and other charges
- Notify your existing home loan provider
- Obtain a no-objection certificate (NOC) from the existing lender that mentions the outstanding amount owed by you
- Provide the NOC to the new bank/loan company, which will pay off the balance with the original bank or financial institution
- Submit the NOC and the property documents and get a sanction letter from the new lender
- Make sure that any post-dated cheques that you may have provided to the original loan company are cancelled and/or returned to you
What to keep in mind when transferring your home loan
Since 2016, the RBI has been taking steps to regulate how banks charge interest on loans. It replaced the base rate – which was the basis for deciding the interest rate prior to 2016 – with marginal cost of lending rate (MCLR). This new standard led to a fall in interest rates for borrowers as the margins charged by banks became more transparent.
On 1 October 2019, the RBI introduced yet another change. Interest on floating rate home loans in India was linked to external benchmarks such as repo rate (the rate at which banks borrow funds from the RBI), quarterly government bond yield, half-yearly government bond yield, or any other interest rate defined by Financial Benchmarks India Ltd.
The RBI has cut the repo rate several times over the last 12 months, which has had a positive impact on home loan interest rates. However, as the economy recovers from the ill-effects of COVID-19, there is a possibility that interest rates may be raised in the near future. Most lenders offer the flexibility of converting a floating rate home loan to a fixed-rate one; while this may protect you from an unexpected rate hike, you may ultimately have to pay more as banks charge higher interest on fixed-rate loans to cover their margins.
In case of floating rate loans, it is critical to check the margin charged by the lender. This is the second component of your home loan EMI, apart from the interest. Some banks have variable margins (or spreads) that rise over time. This could lead to an increase in your monthly EMIs. So insist on a fixed margin, with the interest rate being variable. So, it is critical to check the track record of the new lender in terms of the home loan interest rate before going in for a balance transfer.
|Bank||Interest rate||Prepayment charges|
|SBI||6.95%||0.20% (Rs 4000 min – Rs 17,400 max)|
|HDFC Bank||7.00%||0.25% (Rs 5000 min)|
|Bank of Baroda||7.00%||Rs 10,030 (min)|
One of the ways that lenders make money on home loan balance transfers is by charging processing fees. It is important to read the fine print carefully to understand whether paying a processing fee is worth the amount you save by way of interest. Banks charge anywhere from 0.2% to 2% of the outstanding loan amount as processing fees. In some cases, you may end up paying up to Rs 50,000 or more to transfer your home loan.
Depending on the new lender’s terms and conditions, your request for a home loan balance transfer may take 15–20 days to complete. These days, most lenders use automated loan origination systems, which considerably accelerate the speed of credit approvals.
A hassle-free home loan balance transfer is as important as attractive interest rates, zero processing fees, and value-added features such as a top-up loan. Carefully weigh the cost of transferring your home loan against the potential benefits and you should be able to make an informed decision. Are you buying a home in your hometown or in a big city? Read this to understand what makes financial sense.