As the home loan market expands, competition among housing finance companies and other organised lenders has been tight roped for a better share of the credit segment.
- As per a 4th March 2021 report, incremental home loan spreads levied by Housing Finance Companies narrowed down to 125bps as against 200bps in the second half of 2020.
Housing Loan Balance Transfer – Meaning and Scope
Home loan balance transfer or refinancing is a facility that allows existing borrowers to switch their loan outstanding to a new lender offering reduced rates. Such interest rate reduction enables you to receive substantial savings on your interest payable, reducing the overall repayment burden and EMI amount. The facility comes with other benefits and borrower-friendly terms along with reduced home loan interest rates. The availability of high-value top-up loans is one of the top attractions of a balance transfer facility. A balance transfer facility is also one of the top tips to decrease your home loan interest.Top factors to consider before opting for a home loan balance transfer
Overall cost involved
Depending on the balance transfer charges involved, you need to assess whether your overall savings exceed such costs or not. Note that a home loan balance transfer facility involves fee payment to both existing and new lenders. When availing of this facility, the existing lender would initiate foreclosure of the account, charging the stipulated fees. Similarly, when transferring the loan to a new lender, they consider it a new account altogether, levying a nominal amount as processing charges. Make sure to count in both these charges to determine whether it exceeds the interest rate savings or not. You can use a home loan balance transfer calculator to assess your total savings and compare them with the cost involved. Read also: IMPORTANT DO’S AND DON’TS WHEN TAKING A LOAN AGAINST PROPERTYLender Renegotiation Scope
It would help if you also considered the scope of renegotiation with your existing lender. As market trends on rate levy change, lenders can readjust the interest rate to acclimatise it with current trends. Also, such negotiation can be based on their customer retention policies. So, you can utilise the opportunity to renegotiate terms of borrowing with your lender and secure better rates. Check the interest rate differences and compare the impact of rate reduction with the existing rate to estimate interest savings. You can utilise a home loan EMI calculator to check the change in interest payment before proceeding. The balance transfer benefits significantly outweighing renegotiated rates can be one of the crucial reasons you should choose a home loan balance transfer.Timing of Balance Transfer
The timing when you opt for a housing loan balance transfer facility is of critical concern in your financial decision. Know that the EMIs payable comprise both principal and interest components throughout the loan tenor. However, towards the beginning of the tenor, the interest component is higher than the principal component. Thus, if you opt for a balance transfer facility early into the tenor, it can save you from paying a good portion of your interest liability. Contrarily, choosing refinancing later on in the tenor adds to your financial burden as the interest is already significantly paid with a higher chunk of principal outstanding. Some lenders, however, limit your balance transfer option until the payment of a certain number of EMIs. Check such limitations with your existing lender to make a better financial decision.Benchmarking System Followed
The total interest liability on your home loan depends on the benchmarking system followed by the lender, both existing and new. As per RBI’s latest guidelines, home loans must be extended based on an external benchmarking system. As the repo rate serves as an ideal external benchmark, many lenders extend loans at Repo Rate Linked Lending Rate (RLLR) system.- As per the 2021 announcements under the RBI Monetary Policy, the repo rate has been kept unchanged at 4%.
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