According to a report, home loan balance transfer by borrowers has risen by 20% on all sanctioned mortgages as of July 2018. Previously, the main reason behind switching loans was to avail a better rate of interest.
Nonetheless, top housing finance companies (HFCs) have introduced various offers, grabbing the attention of a majority of would-be homeowners.
Although when you switch your home loan to lower interest rates ensures substantial savings, experts suggest other equally important factors that also affect investments in the future. This includes an outstanding amount, remaining tenor, switching costs, etc.
Factors to remember before opting for a balance transfer
Here is a list of everything you need to know about switching a home loan.
- Look for favorable interest rates
One of the most important reasons why homeowners switch loans avail a lower rate of interest. As RBI brought down the repo rate by 0.5% in 2019, consumers are always on the lookout for financial institutions offering cheaper rates.
Customers who have covered only a small portion of their home loan tenor can receive a more significant benefit from a home loan takeover. Since it is early in the repayment cycle, most of the EMIs are comprised of the interest amount. As a result, a large part of the principal amount is still outstanding, and most of the interest is paid off.
By switching over to a low-interest rate, borrowers can save a significant amount on the interest cost charged by their previous lender.
- Availability of top-up loans
Top financial organizations also offer the advantage of incremental funding facilities. There are various ways customers can benefit from a top-up loan.
Interest rates remain similar to that of the home loan, even though it is treated as a personal loan.
Furthermore, a top-up loan is subject to tax exemption if it is used for:
- Home renovations or repairs.
- Children education.
The tenor for the top-up loan varies from one financial institution to another. However, financial lenders are known to offer a maximum tenor of up to 20 years. They can even set a repayment period in line with the tenor of the original home loan.
- Charges associated with a home loan balance transfer
The process of switching from HFCs can carry additional charges. They must be considered before calculating the actual benefits. Some of the common expenses include:
- Processing fees.
- Valuation fees.
- Legal charges.
- Stamp duty cost.
- Technical charges.
- Foreclosure and prepayment charges.
- Other miscellaneous fees, as requested by the financial organization.
Borrowers are advised to ask the HFC regarding hidden charges on home loans before signing the deal.
- Best time to switch home loans
If you got a raise or a promotion at your work, you could increase your EMI payments. The sooner you pay off your debt, the fewer amounts you have to pay as interest.
However, financial organizations usually charge a prepayment fee for paying off your loan before its term. To avoid paying the fee, you can consider switching to a different lender.
You can even use an online home loan transfer calculator to figure out how much you have to pay to clear off your loan.
The same applies if you are unable to make timely payments, maybe as a result of losing your job or other financial liabilities. Instead of extending the tenor and settling for lower interest, it is better to consider a balance transfer.
Although a lower interest seems appealing, by the end of your term, you can end up paying a significant amount as interest.
Every financial institution offers home loans on their borrower friendly-terms. They also have different screening procedures to determine eligible candidates for a home loan balance transfer.
Top financial institutions often determine the eligibility based on:
- CIBIL score- A higher CIBIL score ensures you receive the best interest rate.
- EMIs- The borrower has to pay a minimum number of EMIs before applying for a balance transfer.
- State of property- The property must already be occupied or at least ready to occupy.
You can even calculate home loan eligibility to find out the appropriate loan amount for your preferred tenor.
A home loan switch requires the following documents for approval:
- A comprehensive list of your home loan payment history.
- Foreclosure letter.
- No objection certificate.
- Home loan documents provided by your previous financial organization.
This information provides an in-depth understanding of the various processes involved in applying for a home loan balance transfer. It can help you decide on a lender that aligns with your financial interests.