The onset of the COVID-19 crisis has led to things like pay cuts, job losses, etc. People who already had loans running are now considering refinancing them to ease off their financial burden to some extent. Some think a home loan balance transfer may help to decrease their monthly loan EMI and give them some added perks which the current lender overlooked. But it is preferable to continue with the current lender until their rate of interest touches a level where the difference in the interest rate as compared to the rate offered by the other bank offering balance transfer becomes considerably high. Never consider a difference of 5-20 basis points (BPS) a reason for a home loan balance transfer. Basis points represent changes in interest rates, that can increase or decrease the cost of your loan. One basis point equals 0.01%, or 0.0001.
Things To Check Before Home Loan Balance Transfer
Now if you have made up your mind about the home loan transfer, then here are a few points which you should check out once again before you finalize anything:
- Rate of Change in Interest – Do not get worked up with a rate hike on your home loan and immediately think of a home loan balance transfer. Calculate the exact amount of increase in your home loan EMI. Also, it is best not to jump at the first offer you get from a new lender. As a rule of thumb, if more than 75% of your loan repayment tenor is pending and the difference between the existing home loan interest rate and the prospective rate of interest exceeds 75 basis points, then it does make sense to go for a home loan balance transfer. Your home loan balance transfer calculator can help you in this regard. However, if you are at the very end of the repayment tenor, most of the interest is paid and there is not much saving you may see even if you move to a lower rate of interest, then it is best to stick with your current lender.
- Possibility of Switch from Fixed Rate Home Loans to Floating Rates – Fixed rate home loans have fixed interest rates during the entire tenor of the loan and this rate is not liable to change no matter what happens. Floating home loan interest rates however change with changes in the market conditions. Floating home loan interest rates are also often cheaper than fixed interest rates. In a fixed-rate loan, the interest rate is stable, and it is higher than the floating rate home loan. Banks often offer floating rates to new customers and change them later on with changes in the market rate. Older customers often tend to lose out on such privileges, so if you want to switch from fixed-rate home loans to floating rates, keep a keen eye on the offerings by new lenders.
- Your Credit Rating – Your credit score gives you a clear indication of whether you are eligible for a balance transfer or not. If you have been inconsistent in repaying credit and EMIs on time, it will no doubt reflect poorly on your credit score or CIBIL rating. A poor credit score affects your financial credibility and means you are less qualified for a loan balance transfer facility since the new lender will take into account your credit score along with other factors. Make timely credit card bill payments, and EMIs to ensure that your credit score is high and you have no problem transferring your home loan to another bank.
- Clauses in The Agreement – Your current bank may apply a penalty charges clause in case of the balance transfer. Check out your home loan agreement thoroughly. Penalty charges are usually higher in the initial years and decrease with time. So, if you are transferring the home loan make sure that the penalty is worth the lower home loan interest rate and other benefits that you may get from transferring the home loan. Read the documents carefully and be clear if there are any other hidden charges or terms and conditions which need to be taken into account before deciding and signing the balance transfer of home loan papers.
- Added Facilities Offered – Previously the lending institutions were not bothered after giving loans to a customer, but today, banks want to retain their existing home loan customers with added benefits apart from lower interest rates, top-up loans, and longer tenor loans. They offer facilities, such as zero balance accounts, flexi-deposits facilities, credit cards, locker facilities, and current accounts wherein you can keep your temporary surplus to save on interest costs. Most people having a home loan have received some of these facilities from their lenders. If you decide to move out and go for a home loan balance transfer, you should also account for the expenses that you will now incur on these facilities if they become chargeable.
Summing it Up
A home loan transfer is a great way to bring down interest outgo and channel the savings into other investment avenues to enhance your riches. But is it the best decision? Your existing bank may lastly offer you rates at par with the other banks when they see you leaving, and that would not be such a bad deal as you will save all the charges as well as the time and energy needed to get the balance transfer done.