home loan transfer
Taking a home loan is a big decision for most Indians, as it often becomes the longest and heaviest financial burden of their lives. Nowadays, many people adopt the path of home loan balance transfer to get lower interest rates, that is, they withdraw their outstanding loan from one bank and shift it to another bank. But is it beneficial every time? The answer to this may be different for everyone. Therefore, before taking this step, it is very important to understand some important things.
Low interest rates are not always beneficial
Of course, taking a loan at a low interest rate sounds great. Suppose your existing bank is charging you 9% interest, and another bank is ready to give loan at 8.5%. The difference of half a percent may seem small, but if the loan tenure is long, it can give you savings of lakhs of rupees.
But note that this benefit is mostly available when the transfer is done at the beginning of the loan tenure. In the initial years, a large part of your EMI goes towards interest, hence at that time the benefit of less interest is more. There is not much benefit in transferring the loan in the last years of the loan, because then you are paying most of the principal amount.
Know the hidden costs of transfer
Loan transfer is not a free process. The new bank may charge many expenses like processing fees, valuation fees and legal charges before giving you the loan. Many times these expenses can go from thousands to lakhs, which can swallow your total savings.
If your loan outstanding amount is low or the loan tenure is about to end, the benefit of the transfer may be less than the cost to you. Therefore, without understanding the complete mathematics, transferring money just for the sake of interest rate can be harmful.
Not just rates, facilities also matter
Some people think of transferring money more because of the bank’s facilities rather than the interest rate. The new bank can offer you facilities like top-up loan, flexible EMI options, and low pre-payment charges. If your existing bank has strict rules, such as imposing a penalty on every pre-payment, your new bank may prove to be more accommodating.
When not to transfer balance?
If you have paid more than half of your home loan, the transfer will not benefit you much. This is because now a large part of the EMI is going towards the principal amount, and the interest remains less. Additionally, if your credit score has declined, the new bank may refuse to give you a loan on good terms. In such a situation, transfer can be more troublesome.