A home loan balance transfer is the process of shifting the remaining loan principal of a home loan from the existing financer to another. In the process, you repay the loan to your existing borrower through the new financer via a new loan account created with the latter.
Mr. A availed a home loan of Rs. 40 lakh from financer X at an interest rate of 9% for a repayment period of 20 years or 240 months in January 2015. The loan components – EMI, total interest payable, total amount payable – are given below.
- Rs.35,989 – EMI.
- Rs.46,37,384 – Total interest payable.
- Rs.86,37,384 – Total payable loan amount.
He decides to transfer home loan balance to financer Y, who levies an interest rate of 8.5% on home loans on 1st January 2019. Hitherto, in terms of principal, he has repaid Rs.4,51,718. Therefore, financer Y facilitates a balance transfer of Rs.35,48,282 for Mr. A, which is 11.29% of the original loan amount. The repayment tenor is adjusted accordingly to 16 years by the financer. On that account, the revised loan components are provided below.
- Rs.33,868 – EMI.
- Rs.29,54,385 – Total interest payable.
- Rs.65,02,667 – Total payable loan amount.
What are the benefits of a home loan balance transfer?
The benefits of home loan transfer are –
- Lower EMIs
You can reduce your EMIs with a home loan balance transfer. As demonstrated in the above illustration, when Mr. A opted for a balance transfer, his EMIs were reduced from Rs. 35,989 to Rs.33,868, effectively saving Rs.2121 per month. Note that, he can still easily choose to pay even lower EMIs by extending the loan tenor to beyond 16 years is acceptable for the lender.
When you transfer your loan balance from one financer to another to benefit from lower interest rates, you consequently have to pay lower EMIs towards loan repayment. It allows you to liberate your monthly income and your FOIR. A lower fixed-obligation to income ratio allows you to accommodate additional expenses without affecting your financial standing.
- Tenor reduction
There are 3 resultant alternatives of a home loan balance transfer which you can opt for. As mentioned earlier, you can lower your EMI. On the other hand, you can also decide to shorten your repayment tenor while maintaining a similar or a slightly higher EMI. If the lender and the repayment schedule permits, you can reduce both the loan tenor and the EMIs as well.
As the home loan is a long-term financial commitment, several individuals prefer to reduce the repayment tenor.
Considering the illustration mentioned above, Mr. A decides to opt for a repayment tenor of 13 years or 156 months during the balance transfer. Consequently, he needs to pay an EMI of Rs.37,654 from thereon.
Additionally, as a consequence of a shorter repayment tenor, the total interest payable lowers down to Rs.23,25,367 and the total amount payable to Rs.58,73,919. This is an example of how balance transfer helps you save money.
- Top-up loan
When you make a balance transfer with certain financial institutions, you are qualified to avail a top-up loan. It is an additional credit which you can optionally avail over and above your home loan balance transfer.
Top-up loans are a form of personal credit, implying no end-usage restriction. You can use it to make a big-ticket purchase or renovate your home or purchase another property. You can use a top-up loan calculator before availing it to calculate your monthly obligations.
When you opt for lower EMIs on balance transfer, it reduces your FOIR, thus allowing you to accommodate additional loans. A top-up loan easily fits into the reduced FOIR as it is offered in an attachment to the just transferred home loan. Additionally, top-up loan interest rates are comparatively lower than those on other unsecured credit facilities.
A home loan balance transfer is one of the most convenient facilities which financial institutions provide to the borrowers. Henceforth, it is essential to keep track of the changing interest rates on home loans levied by different financers even after you have availed one.
There are a few things to keep track of when you do a home loan balance transfer such as prepayment charges, foreclosure charges with the previous lender, etc. Consider such fees for a financially beneficial home loan balance transfer.