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The huge deposit in Banks due to demonetization has led to reduced lending rates to the lowest in the last 6 to 8 years by the Banks/ NBFC’s. Leading the pack, few nationalized banks has reduced the home loan rates by 50 basis points (bps) to as low as 8.5 per cent (fixed). Even the private Banks and the NBFC’s in the home loan segment, has also reduced its home loan rates by 45 bps. However, due to rate cuts the fresh borrowers are the primaries who are benefitted and many existing home loan borrowers are considering a home loan balance transfer to avail the most of the low interest rates.
Following are the few factors that can help you to decide whether the borrower should opt for a home loan balance transfer now or not:
For most borrowers savings is the main reason to transfer their home loans. However, it is important that a home loan balance transfer should be opted only if the total savings in interest payout is significantly higher than the cost incurred while transferring the loan. Usually various fees are charged by the new lender such as conversion fee, processing fees, administrative charges etc. during the loan transfer.
It is to remember that the earlier the borrower transfer the home loan, the higher will be the savings in the interest payout throughout the loan tenor. For example, let’s assume that Anshu have a home loan of Rs 70 lakh of 20 year tenure at the rate of 9.5 per cent with just 4 years left to pay. If Anshu transfer it to a new lender that offers a loan at the rate of 8.5 per cent interest than the total savings in EMIs will be Rs 4501 only. Being the loan in its last years, the borrower has already paid the interest part. Similarly, if Anshu transfers the same loan amount of same tenure at same interest but with 15 years left to pay, he would be saving a lot of amount on his interest payout. Therefore, it’s better to avoid loan transfer (balance transfer) when the loan is in the last leg of its tenor.
Presently only banks provide MCLR-linked loans. Compared to RPLR and base rate system, the rate setting mechanism of MCLR regime is more transparent. With the MCLR regime, the probability of policy rate transmission is also higher. RBI has directed Banks to allow their base rate borrowers to shift to the MCLR system. The housing finance companies (HFCs), NBFCs and other financial institutions do not come under the orbit of MCLR. Therefore the borrower can transfer the home loan to a commercial bank if the difference between the present rate of thee NBFC loan and the rates offered by Banks is significant. Switching to MCLR increases the probability of benefiting from future changes in interest rates.
Banks/ NBFCs offer top-up loans to their present home loan borrowers when they require more funds above their existing loan amount. Top-up loans are similar to personal loans and the borrower is free to use the loan amount for any purpose — like renovation of home or office, medical expenses etc. The interest rates for top-up loans are also usually lower than that of the personal loans. The borrower can easily transfer the existing home loan if the current lender does not approve a top-up loan or charge a higher rate of interest on the top-up loan.
While transferring the existing home loan to a new lender is similar to availing a new loan, where the new lender will have its own set of terms and conditions. The borrower can negotiate or re-set the loan EMI and tenor and top up as well. The borrower is free to opt for a home loan transfer (balance transfer) if the existing lender does not allow the borrower to reset the terms and conditions of the loan. The borrower can visit the online financial marketplace such as mudrahome to compare and choose amongst the various balance transfer options.
Presently, the home loan balance transfer is beneficial especially for those who have a long tenor left for the repayment of the loan. As there is a space for further policy to bring down the interest rates in near future, the borrowers under the base rate system can either switch their loans to MCLR regime or transfer to a Bank/ NBFC that offers better interest rates at better terms and conditions. The home loan borrowers from housing finance companies can also look forward to transfer their balance loan amount to commercial banks as that will bring them under the orbit of MCLR regime. However, it is always important to ensure that the benefits of transferring the present loans significantly notable rather than the cost involved.
