- Is your home loan interest rate much higher than what's prevailing in the market? It's time you make a balance transfer and reduce interest outgo
- Balance transfer is a process by which you can transfer the outstanding balance to another lender at a lower rate
Do you know you can save more than ₹2 lakh on a home loan? Yes, it’s possible if you make a balance transfer at the right time. The balance transfer is a process by which you can switch the existing loan balance to another lender at a lower and better rate. It not only reduces the overall interest outgo but also the monthly obligations i.e. Equated Monthly Installment (EMI). So, when should you make a balance transfer to benefit the most? Read on to know the same.
When the Existing Interest Rate Exceeds the New Rate by At Least 0.25%-0.50%
In home loans, even the difference of 0.25%-0.50% in interest rate can bring a significant difference to the overall interest outgo.
Let’s consider an example to understand the difference.
Example – You applied for a 20-year home loan of ₹50 lakh two years back at 8.90% interest rate. The Equated Monthly Installment (EMI) must be ₹44,665. You must have paid interest of ₹8,73,602 so far. Now, the outstanding balance is likely to be ₹48,01,636. At this pace, you could pay interest of around ₹57,19,656 by the time the loan wraps up. But if a new lender comes with an offer of 8.50% to take over the remaining outstanding balance, how will it reflect on the repayment? Check out the table below to know the same.
|S. No.||Repayment Aspects||Details|
|1||Original loan amount||50,00,000|
|2||Old interest rate||8.90%|
|4||Outstanding balance after 2 years||48,01,636|
|5||Interest paid so far||8,73,602|
|6||Total interest to be paid @8.90%||57,19,656|
|7||Remaining tenure left||18 years|
|8||New interest rate||8.50%|
|10||Interest to be paid @8.50%||45,89,347|
|11||Interest paid @8.90%+interest to be paid @8.50%||54,62,949|
|12||Interest to be saved on balance transfer||2,56,707|
Balance transfer comes with a fee of around ₹10,000 plus applicable GST. As of now, GST is levied at 18%. In that case, the fee would be around ₹11,800. If you deduct ₹11,800, the resultant savings would come as ₹2,44,907.
When There’s Considerable Time Left for the Loan Tenure to be Over
Transferring the balance to another lender could prove good when there’s a considerable amount of time left for the loan to be over. A lot of years means the prospect of saving interest is higher compared to when the loan is just a few years away from completing its lifetime. It doesn’t mean you should not hunt for a balance transfer opportunity when the remaining tenure is less. It’s just that savings can be more with more years left.
When You Require Additional Funds
You can also look to transfer the balance when you require additional funds to meet your personal expenses. You not only get the remaining balance transferred at a lower rate but also avail a top-up loan at the same rate, yielding you good savings.
Formalities Required for Home Loan Balance Transfer
The execution of balance transfer is contingent on completing the following formalities.
- Request the existing lender to issue you a statement showing the total outstanding balance, the amount of interest & principal paid so far, the tenure left
- Submit the statement to the new lender
- Also, ask the existing lender to issue a No-objection Certificate (NOC) regarding the balance transfer and submit it to the new lender
- The new lender will undertake a credit appraisal and a legal & technical verification and initiate the process of closing the loan account with the existing lender
- Subsequently, the loan account will be transferred to the new lender
- After all that, the new lender will receive the property-related documents from the existing lender