Real estate loan balance transfer: when should you opt for it?

Existing home loan borrowers can exercise the home loan balance transfer option to transfer their outstanding home loans to other banks/housing finance companies (HFCs). Under this facility, the new lender repays the outstanding principal amount of their outstanding home loan to the existing lender and in turn sanctions a new home loan to the borrower. The borrower must then repay the home loan based on the new interest rate, loan term, processing fees and other expenses, etc., as decided by the new lender.

Here are some of the situations in which existing home loan borrowers should exercise the home loan balance transfer option:

They are eligible for home loans at lower interest rates from other lenders

Interest rates for home loans offered by banks and HFCs differ significantly depending on the credit profile of individual borrowers. Lenders also consider their own cost of funds and other financial/market-based parameters while setting interest rates for home loan borrowers. The transmission of policy rate changes to existing borrowers may also vary depending on the interest rate regimes applied to their respective home loans. Therefore, home loan borrowers should opt for balance transfer if other lenders offer them home loans at much lower interest rates.

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Improved credit profile makes existing borrowers eligible for lower interest rates

Lenders add the spread and the credit risk premium (CRP) to their underlying benchmark rate when setting the interest rate for mortgage borrowers. The spread and CRP components are usually decided based on the borrower’s overall credit profile. Home loan borrowers with better credit profiles are usually charged a lower spread or CRP and vice versa.

“Some of the key aspects of an applicant’s credit profile used to determine the Gap/CRP include their credit score, monthly income, professional profile, and employer profile (for salaried applicants). Therefore, existing home loan borrowers who had to pay a higher CRP/spread at the initial sanctioning of the loan and who have experienced a major improvement in their credit profile since then may consider the balance transfer option for their home loan. They might be eligible for lower interest rates on home loans due to their improved credit profile,” informs Ratan Chaudhary, Head of Home Loans,

The existing lender does not sanction the top-up of the current home loan or charge higher interest rates for it

Banks and HFCs offer complementary home loans to their existing borrowers provided they have repaid a predetermined number of EMIs and have a satisfactory repayment history. Home loan borrowers may use the additional facility for any purpose except speculation. Lenders usually charge lower interest rates for add-on loans compared to other options like personal loans, title-based loans, etc. Many lenders offer supplemental home loans to home borrowers exercising the balance transfer option. Thus, borrowers of existing home loans who are unable to avail the top-up facility on their home loan with a lender or those who are charged higher interest rates can opt for the balance transfer of home loan and simultaneously benefit from the additional loan from the new lender.

Things to Consider When Exercising the Home Loan Balance Transfer Option

* Balance transfer results in substantial savings on overall interest cost

New lenders treat an existing home borrower’s balance transfer request as a new home loan application. Thus, borrowers of existing home loans wishing to transfer their home loans to other lenders may incur processing fees, administrative fees and other fees levied when applying for a new home loan. “The new lender will also conduct its own documentation and approval process when processing the home loan balance transfer request. As such, borrowers of existing home loans should only select the balance transfer option if it results in significant savings in interest charges after taking into account the associated costs and effort,” says Chaudhary.

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* Balance transfer leads to greater savings in the initial stages

The EMIs of home loans are a sum of the principal and interest repayment components. The proportion of the interest component in an EMI home loan is highest in the early years of the loan term. As the tenure progresses, the proportion of the principal amount in the EMI becomes higher. Thus, exercising the balance transfer option during the initial stages of the home loan term provides greater benefits in terms of interest cost savings for the borrower.

* Make sure the new term of the loan is the same as the remaining term

Borrowers of existing home loans considering the balance transfer option should ensure that the term of the transferred home loan and the remaining term of the original home loan are the same. Going for longer mortgage terms will increase overall interest costs for borrowers, which goes against the main reason for shifting mortgages, which is to reduce the total cost of interest. Thus, existing borrowers should only choose a longer mortgage term if they wish to reduce their EMI burden.