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A home loan balance transfer is the means of transferring an existing home loan to another lender at a lower interest rate and other benefits. It is very similar to a new home loan.
When a borrower makes a balance transfer, their entire outstanding balance is transferred to the new account, where the new lender pays the resting balance to the previous lender, and the account is closed. The new interest rate allows the borrower to save on monthly payments or EMIs, as well as on mortgage interest.
A home loan generally includes a large amount of money to be paid and the interest rate on the home loan is very high in India compared to the rest of the world. Over a 20-year period, a borrower easily repays 2.5 times the loan received. For example, an INR 1 crore loan can easily earn you INR 2.5 crore over 20 years.
Even a 0.5% reduction in mortgage interest rates can affect total spending. One way to lower your interest rate is to check with your current lender. However, if the current lender refuses, it is still possible to transfer the balance to a new bank. But, to take that into account, it will have its pros and cons.
Here is how the mortgage transfer can benefit the borrower in many ways.
A lower proposed interest rate than the existing one is an initial indicator that a borrower is transferring the mortgage to a new lender. Borrowers’ interest rates are generally floating, which means that they are tied to the general macroeconomic environment. When interest rates drop, some lenders may not pass the benefit on to existing borrowers or may have a delay in lowering interest rates. Borrowers also have the option of choosing fixed interest rates.
However, if another lender offers a better interest rate, of course, it is tempting to turn to a new lender who will consequently lower your EMI by lowering the interest rate.
When opting for a home loan, the borrower has two options: a fixed rate and a variable rate. Fixed-rate means that the interest rate does not change with market changes and gives the borrower the ability to set the interest rate according to their ideal budget. For variable rate home loans, interest rates are flexible according to market fluctuations.
There are times when you have a fixed-rate plan and interest rates in the market are falling. In such a scenario, you may want to switch to a floating rate. Conversely, if your home loan is at a floating rate and you think interest rates will skyrocket and stay the same over the long term, a fixed rate may be a good option.
