Credit Wisdom

How to get rid of costly home loans?

Category: Balance Transfer

A loan to buy a house is one financial burden which greatly affects your finances as it involves a sizeable amount of your income that goes into paying for it. To look for options where you can reduce repayment of existing home loan and easier terms and conditions or even reduce or extend the tenure of home loan, you need to relook at prevailing interest rates and facilities on home loans offered by different banks or financial institutions.

Home loan interest rates range anywhere between 9 % to 15 % and it is highly recommended that you take home loans based on sound financial planning and extensive research. That way you can ensure that you have to pay less interest on your home loans. But what about those who have already taken a home loan and repaying the loan is crippling their finances. What is the exit rout to reduce interest rates on their existing loans? Well, one such option and the most common one you can opt for, which almost every bank or financial institution provides is called balance transfer.

Balance transfer as the name suggests is the transfer of your outstanding home loan to another bank where interest rate is lower and terms and conditions are more attractive than the bank or financial institution that had originally extended the loan. You are basically taking a new loan from another bank for paying your existing loan. The benefit is that you now get to pay less than the amount you would have ended up paying had you remained with your existing bank.

Balance transfer is highly beneficial, and if you have been paying your EMIs regularly and your creditworthiness is sound, you can avail the facility of balance transfer. But, whether to go for balance transfer or not entirely depends on benefit you will get and the cost you will incur.Balance transfer depends on the difference between the interest rates offered by the two banks, the amount of the unpaid loan and the tenure remaining. You need to keep in mind that balance transfer involves cost in terms of processing fee that banks charge you for balance transfer. Hence, weighing benefit against cost for balance transfer facility is highly advisable as it may not at all be that beneficial.

Balance transfer works best if you are in the early periods of your home loan. In such case even 0.5 % difference in interest rate will be very beneficial. For example, if Rs 30 lakh is left unpaid for your home loan and your current interest rate is 12 %, you would have to pay Rs 37 lakh as interest. If you opt for a balance transfer and your new interest rate is at 11.5 %, your interest outgo over 15 years would be Rs 35 lakh or a total savings on interest of 2 lakh. That is a substantial amount you can save even after accounting for processing fee. For balance transfer, banks charge 0.5 % of the loan or a flat Rs 5000-10000 as processing fees.

The other benefit to switch your home loan to other bank is that you can also extend the tenure of your home loan to lower your EMI that your existing bank is not willing to extend. Also, the property value against which you had taken the loan might have climbed much higher and in all likelihood you might want a top up loan based on the current value of your property. You can negotiate more favourable terms on top up loan with the new bank.

Given the nature of Indian baking sector that is highly competitive, banks often try to grab the bigger pie of home loan market and provide flexible terms. As a result, some banks do not levy prepayment penalty and in high interest rate regime banks also do not charge processing fee on balance transfer. However, transferring your home loan to a new bank means you have to go through all the procedures involved afresh. These include credit appraisal, legal verification of property documents and technical evaluation with the new bank. But, the benefits along with the amount of money saved from loan transfer far outweigh the time invested, if chosen wisely.

Tags: Home Loan Articles