Switching home loans, commonly known as a home loan balance transfer, is the process of transferring a housing loan from one lender to another. In such an arrangement, your future lender clears the current dues to your existing lending institution. After that, you begin to pay the EMIs to your new lender.
The primary reason behind this transfer is a more attractive interest rate. A home loan is long term loan and tenor can go up to 20 years. Therefore, if a lender offers a more competitive interest rate, it can save a substantial amount in the long run. Moreover, better terms like shorter tenor, top-up loan interest rate, etc. can persuade borrowers to move to another lender.
Thus, if you are planning a home loan transfer, then you should keep in mind the following points before opting for it.
Points to Ponder Before Availing Home Loan Balance Transfer
- Verify the credibility of your new lender
It is quite natural to get carried away when a lender offers you a more competitive interest rate. However, you should check the credibility of the company and its offer before opting for a home loan transfer. It is imperative to do a background check of the company before availing their services.
Additionally, if a lender is advertising an attractive interest rate, then it is essential to obtain more information about it. You should check whether this is an actual offer or just a short-term gimmick.
- Evaluate the transfer cost
Home loan balance transfer has several charges or fees attached to it—processing fees, application fees, pre-payment charges, legal fees, etc. Moreover, there are fees for home loan transfer, which will be charged by the existing as well as the new lender. Therefore, you should consider such costs before deciding. In some cases, these costs can outweigh your interest savings. Opting for a balance transfer does not make sense, in such cases.
- Check whether the spread is variable or fixed
Home loans with a floating rate of interest have two parts, the benchmark rate and the spread. The benchmark rate here changes over time, whereas the spread remains fixed except in case of default. However, some financial institutions offer home loans at a floating rate where both the benchmark rate and the spread is variable. In case you opt for one such loan, you may witness that your home loan interest rate is rising after a period.
Therefore, it is best to avoid any home loan at a floating interest which has a variable spread. Instead, you can opt for a loan where only the benchmark rate changes.
- Loan eligibility of the new lender
Cost of the property includes several additional heads apart from its basic price, security deposit, and service tax. These are external development charges, preferred location charges, electrification charges, power-back up charges, etc. However, the inclusion of such charges varies from one lender to another.
Therefore, if your new lender does not include such charges under the cost of the property, then your loan amount eligibility will reduce. Hence, you have to increase your contribution to fill up the gap.
- Checking the remaining tenor of your loan
If you have already paid a considerable portion of your home loan, then it is not ideal to opt for a home loan balance transfer. The chances are you have already repaid the lion share of your due interest.
Alternatively, if you have just started repaying your home loan, then a transfer like this can be greatly beneficial.
Every prominent housing finance company offer this feature. Additionally, they provide extra features like a top-up home loan, minimal documentation, etc. You can use the top-up loan calculators available online to get a better understanding.
Additionally, such HFCs provide pre-approved offers on their home loans along with other products like home loans, reverse mortgage loans etc. You can check your pre-approved offers by submitting your essential contact details.
There are several benefits of a home loan balance transfer. Prominently it reduces your burden in the long run. However, before opting for it, you must consider the points mentioned above to make an informed decision.