If you are an existing home loan customer of Bank ABC and find that you are stuck in a higher band of interest rates, because your existing bank is slow to pass on the benefits of a lower interest regime (during a lower interest rate cycle), you could consider re-negotiating the interest rates with your bank based on your good track record of repayment.

However, if Bank ABC refuses to give you a hearing, you could always consider switching your loan to another bank to get the benefits of a lower interest rate. You may also be willing to make a balance transfer if you are not satisfied with the service that Bank ABC provides. In banking parlance, this process is also called “refinancing”.

The process of a balance transfer

1. You submit a letter to your existing bank (Bank ABC) requesting balance transfer of Home loan and to provide a certificate confirming the balance outstanding and the list of property documents held by them
2. Bank ABC processes your request and gives you a no objection certificate confirming your outstanding amount along with the list of property documents held by them
3. You submit this letter to your new bank (Bank XYZ) which runs a credit appraisal process and sanctions your loan amount.
4. The loan amount once disbursed is passed on to Bank ABC, which closes your loan account.
5. Your property documents are handed over to Bank XYZ and your remaining postdated cheques or ECS with Bank ABC are cancelled.
6. You start paying off your loan to Bank XYZ at a lower rate of interest.

Advantages of balance transfer

• Getting a lower rate of interest – This is undoubtedly the most popular reason to transfer your loan. An interest differential of 0.75% to 1% is a good enough reason to consider a balance transfer
• You can bring down the tenure of your loan- Say, you have received a good salary hike and can afford a slightly higher EMI now but Bank ABC is not ready to lower your interest rates. You can then switch your balance to Bank XYZ at a lower rate of interest, pay a slightly higher EMI and save up considerable amount of money in the long run by lowering your tenure. As a result, you will end up owning your own home sooner

What you should watch out for

• The charges involved- Before you think of a balance transfer to another bank consider the various charges involved. You must firstly take into account the processing charges (can be anywhere between 0.25 to 1% of the amount being sanctioned). Some banks have a fixed amount as a processing fee (some banks have capped it at Rs 5000) while others may charge a fee on the basis of your financial position (whether you run a business or are a salaried individual). Other charges include stamp duty, valuation fee, legal charges and other allied charges that Bank XYZ may charge you (since you have to go the rigmarole of credit appraisal again). Some banks may even ask you to open a savings account with them and route the EMI through this account. Yet others may ask you to fix a certain amount as a fixed deposit as a collateral. Compare all these charges with the benefits you are getting and see whether you are still making substantial gains
• The so called freebies- In order to woo customers some banks use the baits of other products such as accident insurance or a free credit card. Before you bite the bait, question yourself whether you really need such products or at least check the terms and conditions under which such products are issued

Finally, before you make the decision of a balance transfer, read all the terms and conditions of both the banks you are dealing with. After all, all banks are in the business of lending, so why would one bank offer you substantial benefits over the other? Clear all your doubts and suspicions before you take a final decision.