The RBI Governor Raghuram Rajan announced rate cuts which lead to several banks following suit and slashing their interest rates on home loans as well. While this may seem like a blessing for those looking to apply for a loan in the future, the people who are already paying off their loan feel that they can not avail of this benefit. Is that really the case though? With the use of Home Loan Transfer, even existing customers paying off a mortgage can avail of the lowered interest rates.
A home loan balance transfer allows you to benefit from any downward movement in the lending rate of interest. In regards to floating rates, the lender may not always lower the rate far enough or reduce it at all for the customer even if the new loans are available at lower rates. Opting for a home loan balance transfer shifts the entire unpaid principle amount from the original bank to a new bank which will now charge the newer, lowered rate of interest. The bank which takes on the loan from another bank pays the original bank the principle amount. The customer now pays their home loan EMI’s to the new bank at the lowered rates.
While most would think this would lead to only benefits, there is no clear yes or no answer to this question. It is entirely dependent on several conditions. The new bank might charge at the lower rate but it would not be economically viable to transfer the loan if the savings are not enough to justify the time, effort and cost. The conditions which affect a home loan transfer are
- Total cost
- Remaining loan tenure
- Outstanding principal
- Time and effort
When transferring a loan, the customer must pay a processing fee (charged by the bank which is taking over the loan), a pre-penalty fee (this may or may not be charged by the original bank) and other administrative charges. Total savings can only be considered after considering the total cost involved.
If there is less time left for the completion of the loan, it may not be worth the effort to transfer the loan to another bank. If the remaining tenure is long, then the cost will be amortized over the remaining duration otherwise the cost will not be justified. It makes more sense to transfer a bigger principal amount as this would mean a larger amount of savings in the long run.
Research is the most important task before one goes ahead with transferring their home loan. One should also make sure to check with their existing bank if they are willing to charge the lowered rate of interest as this would save a lot of time and effort as well as any unneeded expenditure. Most banks would want to keep their customers and hence would be willing to negotiate a lower rate. Even if the new rate is not as low as the other banks, the customer would still be saving on the various processing fees which a home loan transfer would entail.