How does a home loan balance transfer work?

Written By- Jaya Pathak

Assume that a few years ago, you took out of loan which seemed like a competitive interest rate. But now, you realize that other lenders are offering the loan at much lower interest rates. Every month you wonder that why even you are paying more than you should. This is where the home loan balance transfer comes into play. It is basically a loan transfer which allows you to transfer the remaining loan balance from your existing lender to new lender who offers better terms primarily or lower interest rate. By doing this, you can reduce the burden of your instalments, shorten the interest rates and save a substantial amount.

But you must be bewildered that how exactly does it work? You must be thinking about the benefits, risk and the steps involved. Let’s dive deep into everything you need to know about a home loan balance transfer and the ways you can make the most of this financial strategy.

Understanding Home Loan Balance Transfer

A Home Loan Balance transfer is popularly known as home loan refinance. It is the process of shifting the amount from one lender to another. The primary goal of this transfer is to secure lower Interest rate, and additional benefits like a top up loan.

How does it work?

The new lender replaces your existing home loan balance the old lender. Then you enter a new loan agreement with the new lender under device terms and conditions. Then you start paying to the new lender. As your monthly instalments continue at lower interest rate, you can save the money for a longer run. This process might sound simple, but it requires careful consideration and some strategic planning to maximize the benefits.

Where should you consider home loan balance transfer?

Well, there are several compelling reasons why you should consider a home loan balance transfer. Some of them are listed below:

1. The most common reason for a balance transfer is that you get the room at lower interest rates. Even a slight reduction in the interest rates can result in significant savings over the loan tenure.
2. With lower interest rates, your monthly installments will decrease. It will make the loan repayment more manageable so that you can save the funds for financial goals.
3. There are some borrowers who choose to keep the EMI amount unchanged but shorten the time. It will help to repay the loan faster and save on interest payments.
4. Switching the old lender to a new one might give you the access to better customer service, flexible repayment options or even prepayment facilities without heavy penalties.
5. Some lenders also offer a top up room along with a balance transfer. It is basically the additional loan amount you can avail over your existing loan for home renovations, education and other financial needs.
6. Some borrowers also switched from lenders to new ones due to unsatisfactory services from their current mark. Digital banking, faster response times and lenient repayment policies, a huge difference can be made.

What are the factors to consider before opting for a balance transfer?

While a home loan balance transfer can be beneficial, but it is not always the right moves. Hence, before you are trying to proceed further, you can consider some crucial factors:

1. You can compare the existing interest rates with a new offer. Make sure that this difference is substantial enough to justify the transfer.
2. If you are in the initial years of your home loan, a balance transfer can save you the money. If only a few years are left, the benefits may not be worth the processing fees and other costs.
3. The balance transfer is not free as some charges are included that for the transfer. Generally, a processing fee of typically 0.5 to 1% of the loan amount is charged. The new lender might conduct evaluation of your property. Some states may require some additional stamp duty for the balance transfer.
4. Lenders can also assess your credit score before approving the transfer. If you have a little credit score, you may not get the best interest rate.
5. You can check if your existing lender charges penalty for closing the loan early.
6. Ensure that you meet all the requirements before applying for loan transfer.

Understanding the step by step process of home loan balance transfer

1. You can compare lenders and offers based on interest rates, loan terms, processing fees and customer service ratings. You can use online EMI calculators to estimate the potential savings.
2. You can check your existing terms. You can review your existing loan agreement for foreclosure or prepayment penalties. You can also contact your current lender to discuss the transfer option. You can also negotiate a lower interest rate to stay with them.
3. You can apply for balance transfer with the new lender by submitting an application along with identity proof of income, loan statements from your current lender and property documents.
4. In the next step, your current lender will provide you a no objection certificate or a foreclosure letter stating the amount to be repaid.
5. The new lender will disperse the loan amount directly to your old lender like closing your previous loans.
6. Once the process is done, you can start paying the monthly installments to the new lender under the revised terms and conditions.

Some common mistakes to avoid during a balance transfer

• Do not ignore the processing fees. A lower interest rate might not be beneficial if the transfer costs are too high.
• Check the loan tenure impact. Ensure that the transfer reduces your total interest to be paid in future.
• Make sure that no hidden please discharged before signing the new loan agreement.
• Do not apply for a balance transfer without a good credit score as a poor credit score can lead to rejection or even higher than expected interest rate.
• If only a few years remain in your loan tenure, the savings from a balance transfer might be minimal.

Conclusion

A home loan balance transfer is a powerful tool as it reduces your interest burden and make the ownership of more affordable. However, it is not one-size-fits-all solution. You must carefully evaluate your potential savings against the costs involved before making any decision. If you find a significantly lower interest rate, favourable loan terms and better service, then transferring your home loan could be a smart move.

However, if the benefit is quite marginal and the process is expensive, it will be quite wiser to stick with your current lender. Hence, before making the final call, compare the options, calculate the costs and consult the financial expert if needed.

Read more: Top Business Magazine