The markets are prevalent with anticipation and expectation at the moment and one of things that consumers are expecting to come down are the interest rates. That is good news for you if you are planning to buy a house in the near future, as home loans will also be available at a cheaper rate of interest. But what if you are an existing borrower and you are not getting the benefit of the prevailing market conditions? Well, in that case it does make sense to consider a balance transfer of your loan.
Interest rate advantage
A reducing interest rate cycle is the right time to consider a loan transfer. But that is true only if you are getting an interest rate differential of at least 0.75-1% (or higher). Lets understand this with an example. Lets say you have an outstanding home loan of Rs. 40 lakhs and your current bank (Bank ABC) is charging you an interest rate of 11.5%, and you are still 20 years from clearing your loan. You are paying Bank ABC an EMI of Rs. 42,657.
Now if another bank (Bank DBE) is offering you an interest rate of 10.5% you pay an EMI of Rs. 39,935. That means you save Rs. 2,722 on EMI each month, which can be deployed in some other long term saving instruments. Alternatively, you can choose to pay the same EMI (Rs 42,657) and reduce your loan tenure by three years. In other words you will be the owner of your house in 17 years instead of the earlier 20 years and save about Rs. 6.5 lakhs.
However, do bear in mind that refinance makes sense only if you have a substantial amount of years left in your loan tenure. If you only a few years left in your loan tenure a balance transfer may not be such a good idea. You will have to go through the credit appraisal process again and will have to pay a processing fee and other allied charges to Bank DBE as a one-time cost.
Getting over a financial crunch
It may be the right time to consider a balance transfer if you are in a financial crunch and want to reduce your EMI burden. While a refinance may save you some money on your EMI, do make sure that you consider partial pre-payments when your condition improves.
If you have a compelling enough reason for a loan transfer after having considered all the advantages and disadvantages, you can indeed go in for it. The Reserve Bank Of India has abolished all penalties on foreclosure of home loan, so you need not worry about losing money on closing your loan account with your existing Bank ABC.
So before you get into any agreement with a new lender, make sure that you have clearly communicated with Bank ABC and explored all opportunities to better the terms and conditions and rate of interest on your existing loan. Only when you are sure that all gates are closed you can negotiate with Bank DBE, but do not sign any agreement unless you are convinced that they are indeed offering you the best deal.