Should You Choose A Balance Transfer For Your Home Loan?

According to Reserve Bank of India's (RBI) data, improved buyer sentiment has resulted in outstanding home loans touching Rs. 16.85 Lakh Crores towards the end of August 2022. The data also reveals that there has been a double-digit growth of outstanding home loans from April to August of FY 2022-2023. In December 2022, home loans witnessed a 16% growth, and experts estimate that the home loan market will achieve a 22% CAGR between 2021 and 2026.

While RBI has recently tightened its monetary policy by increasing key rates, it hasn't affected the demand for housing finance in the country. In fact, according to industry experts, there has been an increase in the number of Gen Z homebuyers, with the average age now being 24-25 years!

One of the most significant financial investments a person can make in their lifetime is buying a new home. Considering the existing real estate market in the country, it is almost impossible to pay for a house from one's savings. Thus, home loans have become a necessity, and these loans allow you to purchase your dream house without experiencing immediate financial implications. Home loans are long-term loans, and the repayment periods can go up to 30 years.

However, what if you aren't happy with the existing loan terms? You won't have to keep paying EMIs throughout the repayment period, as you can shift to a new lender offering better loan terms. This is possible through a home loan balance transfer.

What is a Home Loan Balance Transfer?

As previously mentioned, home loans are typically repaid over 10-30 years, and the interest rate remains unchanged if you opt for a fixed interest rate. This rate determines the amount you pay over the principal loan amount over the repayment period. However, the interest lenders charge can vary based on various factors, including RBI's policies.

Home loan balance transfers allow homeowners to save money on the interest they pay on home loans. You can transfer your existing home loan balance to a different lender offering lower interest rates, or better home loan terms. This allows you to enjoy significant savings.

How Does a Home Loan Balance Transfer Help You Save Money?

Lower Interest Rates

One of the main reasons why homeowners opt for home loan balance transfers is to enjoy lower interest rates. Interest rates on home loans vary based on factors such as market conditions, the borrower's credit profile, and the lender's policies. With a lower interest rate, you will pay less interest over the loan period. Thus, you can save a significant amount if you switch to a lender offering a lower interest rate.

RBI Guidelines

In India, the Reserve Bank of India (RBI) regulates interest rates offered by financial institutions. From time–to–time, RBI hikes or reduces the repo rate to moderate inflation. Since 2022, the central bank has hiked the repo rate by a total of 250 basis points to manage inflation. However, the central bank reduces the repo rate as the inflation rate eases. This results in a fall in home loan interest rates. By opting for a home loan balance transfer, you can shift to a lender offering lower interest during such instances.

How Does the New Lender Determine the Interest Rate?

The new lender will also assess your eligibility, and offer a low interest rate if applicable. This depends on your credit score, repayment history, annual income, and outstanding loan amount. The new lender can offer a reasonable interest rate depending on the prevailing market conditions and RBI's guidelines.

Charges Associated with Home Loan Balance Transfers

Additionally, you must know the charges involved before considering a home loan balance transfer.

Processing Fees: The new lending entity will charge a processing fee to process your home loan application, which can go up to 6% of the home loan amount.

Foreclosure Charges: Your existing lender will charge a certain amount for closing the loan before the completion of the loan period. You won't have to pay anything if you opt for a floating interest rate on your home loan. However, if you opt for a fixed interest rate, you might have to pay up to 4% of the principal outstanding.

Why Should You Consider a Home Loan Balance Transfer?

Reduce the Interest Rate: If you currently pay a high interest rate on your home loan, you can opt for a home loan balance transfer. Because of the low home loan balance transfer rate of interest, you can save a considerable amount over the loan tenure.

Enjoy Better Loan Terms: A new lender can offer better loan terms, such as longer repayment periods, lower EMIs, zero processing fees, etc. This gives you the opportunity to negotiate better terms with the new lender.

Top-up Loan: Another benefit of opting for a home loan balance transfer is the top-up loan. This loan amount can be used to meet personal or professional needs, as this amount doesn't come with any restrictions.

Conclusion

From getting a better home loan balance transfer rate of interest to negotiating better terms – you can enjoy several benefits by opting for a home loan balance transfer. However, before proceeding with the process, you must assess your financial situation, and consider various aspects. Check the interest rates offered by the lender, loan terms, and the overall cost of the loan. You must also consider the processing fees and other charges, and make a prudent decision.

A home loan balance transfer allows you to shift to a new lender, and save money on interest. You can also improve your financial situation, as you can benefit from a top-up loan. If the lender offers fair and reasonable terms, you should opt for the home loan balance transfer, and benefit from a nominal home loan balance transfer rate of interest. With the right approach, this process can help you achieve your financial goals, and repay the loan amount without any hassles.