An increasing number of borrowers are opting for a home loan balance transfer to avail lower interest rates and other beneficial terms from a different lender. It is a facility where the remainder of the existing loan is transferred to another lender who forecloses the existing credit on behalf of the borrower with the previous lender. The borrower then starts paying EMIs at the new rate of interest to the new lender.
A balance transfer is a great method to get a better rate of interest, top-up on the existing loan and several other added benefits with little or no pre-payment penalty or processing fees. However, there are certain tips you should know before opting for home loan transfer to get the maximum benefit out of this handover. Here are some of them.
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They are Calculated Based on MCLR
The MCLR (Marginal Cost of Funds based Lending Rate) was introduced on the 1st April 2016. It is the lowest rate of interest below which a lender cannot sanction a loan to a borrower.
All current lending rates are based on this new system instead of the previous BPLR. MCLR brings more transparent and effective revisions parallel to revisions of the repo rate by the RBI. Lenders add a spread or a margin above the existing MCLR and determine the interest rates they offer to borrowers.
Ideally, you should keep a track on the current home loan interest rates, future market forecasts and the undergoing repo rate trends to know whether you should go ahead with the balance transfer.
Top lenders offer borrowers the chance to fix a reset date on their loans availed on floating interest rates. Reset dates are when the interest rates on the loan will be reviewed and revised according to existing MCLR changes.
You can also choose to set the reset period quarterly or half-yearly if you think that the rates might fall. It will reflect on the interest rate faster. Make sure to consider these points before you apply for a home loan.
Calculate the Total Outflow
It is better to calculate the total outflow before opting for a balance transfer. Calculate the loan tenor, interest rate, top-up loan if availed, and processing fees to understand whether you will save more after a takeover or not.
You can use an online home loan EMI calculator to accurately check the amount you will pay throughout the loan tenor.
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Don’t Opt for a Transfer Close to the End of its Tenor
It is advisable not to opt for a balance transfer if the loan’s tenor is nearing completion. Lenders usually recover more towards the interest part at the beginning of the tenor and increase the portion of principal near its completion. Opting for a balance transfer at that time might not be the most profitable decision. The borrower needs to calculate how much he/she will save and how much availing the facility will cost. Accordingly, the decision needs to be taken.
Generally, going through the extensive process of a balance transfer to reduce home loan interest rates may not help you save a significant amount in such scenarios.
Learn about the Time taken to Complete the Transfer
Many financial institutions may take 15 to 20 days to complete the process of balance transfer on your home loan. You should check on the processing time before opting for a particular financial institution for the transfer.
Charges and Benefits on an Offer
It is important to know about the fees and charges levied on the credit before you go for a home loan balance transfer. It is better to opt for lenders who offer competitive interest rates and minimum processing fees.
Some financial institutions may charge zero foreclosure or part pre-payment charges on home loans with floating interest rates. It can prove to be beneficial as you will not pay anything extra above your principal amount. You should also look for additional features like customised insurance solutions to protect your family members against any unforeseen incidents.
Watch to know more about home loan transfer:
These are some of the most important factors you should know before you opt for a balance transfer of an existing home loan. Keeping these tips in mind will help you enjoy all the benefits of availing a home loan balance transfer facility.
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