Home Loans assist a person in buying home. During repayment of home loan, Equated Monthly Instalment (EMI), Rate of Interest (ROI) and tenure are the factors that play a significant role.
Paying back home loans can be a daunting task. So, it is advisable to plan the repayment and find out ways to reduce the burden of the loan.
While timing the EMI well, paying more than your EMI and increasing EMI with an increase in salary have proved to be good methods in reducing loan burden., A home loan balance transfer is another more effective way.
What is Home Loan Transfer?
Home Loan Transfer, also known as refinancing and home loan takeover, is the process of transferring your outstanding home loan from one bank to another. It can be done to avail better service or to lower the rates of interests.
When the new bank approves the takeover of your home loan, it pays the outstanding amount to the current bank. After receiving the pending amount, the existing bank releases all the documents. It also issues a no due certificate to you.
These documents are handed over to the new financier. Once this process is complete, you have to pay all the remaining future Equated Monthly Instalments (EMIs) to the new lender as per their interest rate norms.
When should you consider Home Loan Transfer?
It is advisable to transfer your home loan under these circumstances:
- When the rate of interest in your current loan is higher than current market rates.
- To reduce risk by going in for a fixed rate of interest or when you have a loan with a floating rate of interest.
- To lower your EMI to increase your cash flow.
When should you Not consider Home Loan Transfer?
Under these situations, it is advisable not to transfer home loan:
- When it is an old loan, that is, you have been repaying it for a long time.
- When there is a prepayment penalty in your current bank.
- When you are planning to move out of the property in the near future.
How can Home Loan Transfer reduce the interest burden?
Home Loan transfer can provide you with an option of lower interest rates, which might reduce your EMI significantly. If done in the early stages, balance transfer of loan too will be beneficial to a borrower.
It can also help to negotiate with your existing bank to reduce the rate, so banks will find it profitable to deal with an existing borrower who has not defaulted on payments. So, when you balance transfer, the current bank will give a statement showing the borrower’s outstanding principal.
Once the new bank accepts the balance transfer, it will issue a cheque to the existing bank and take all mortgage papers.
It can also help you get a top-up loan if your bank offers it. Many banks provide it when you are transferring your home loan to them. These loans can be availed at competitive rates and can be used to pay off your immediate debts or can be used for home renovation.
Your current bank might not offer this top-up loan even when there is an increase in the real estate price or market value for your home. However, the new lender will definitely consider the current market value of your property as the standard and may also offer a top-up loan.
Things to consider before transferring home loan
It is essential to look out for various charges such as the processing fee, legal charges, and the valuation cost for a balance transfer. Because of these charges, sometimes the interest rate differential can be so low that the borrower may end up paying more at one-time charges than saving in lower EMI.
So, before opting for home loan transfer, evaluate whether the balance transfer of the home loan you are considering will result in a net gain or a net loss.