Should You Transfer Your Home Loan?

A home loan is often the single largest loan an average individual borrows during their lifetime. Even a slight reduction in interest rates translates to substantial savings in the long term, particularly in case of big-ticket loans like home loans. Therefore, the Reserve Bank of India (RBI) insists that banks pass on interest rate benefits to existing borrowers immediately. Yet, most banks have been quite slow on passing on such advantage to existing borrowers and when these cuts have happened, the reduction is not usually in line with RBI’s cut. If this situation sounds familiar and you are among these unhappy home loan borrowers, there may still be hope for you.

Firstly, based on good repayment track records, your good credit score, etc. you as a borrower could try and renegotiate with your current lender to let you avail lower home loan interest rates. In case your bank does not oblige, transferring the home loan to a new borrower becomes the best option.

Home Loan Transfer, also called Refinancing of Home Loan or Home Loan Balance Transfer, is an accessible and easy method you could opt for in order to take advantage of lower interest rates prevailing in the market.

Reasons for Home Loan Transfer

Benefits of lower interest rate: Lower interest rates offered by a new borrower is the number one reason for getting your home loan transferred. In some cases, lenders permit conversion of the existing higher interest rate to a lower rate, however they charge a high conversion rate. The best way to determine how much you save is to use the home loan balance transfer calculator to evaluate your savings.

Renegotiation: Borrowers sometimes wish to renegotiate the terms and conditions of their current home loan. For instance, they may want a reduction in EMI or an increase the loan tenure, which the current bank may refuse. In such cases, a home loan balance transfer gives you a way out.

Top up: In some cases, the property value sees a sharp increase in comparison to the original value. As a result, the borrower may want to top up the current loan to meet requirements like home renovation, etc. If the current bank does not agree, the borrower may be forced to transfer the current home loan to a new borrower in order to benefit from the home loan balance transfer.

General: Borrowers are sometimes generally unhappy with the accessibility and overall services of their current lender and hence consider transferring their current home loan to a new lender.

How to Transfer a Home Loan?

• The borrower needs to submit an application to the current bank requesting transfer of the current home loan to the desired lender.
• Based on this request, the existing bank gives a letter of consent or a No-Objective Certificate (NoC), along with a statement indicating the full outstanding amount on the home loan.
• The borrower then has to submit all these documents to the new bank to which he/she wishes to transfer the home loan.
• After receiving all the requisite documents, the new lender will sanction the loan amount to the current lender for account closure.
• After all the transactions are complete, the property documents are handed over to the new bank and the ECS/remaining post-dated cheques kept with the current lender are cancelled.
• The new bank would offer the borrower a new home loan for the balance amount based on the current home loan rates prevailing in the market, which they are offering to all home loan applicants. If the prevailing interest rate is lower, the borrower is given this same (lower) interest rate, making the switch beneficial to the borrower.
• The borrower will need to obtain the property documents from the current bank so that those are transferred to the new bank within a stipulated time-frame.

What a Home Loan Transfer Involves?

Regular repayments condition: Home loan transfer is possible only if you have been regular in loan repayments to the current bank.

Treatment of transferred loan: The new bank you are switching the loan to will treat the transferred home loan as a fresh one. You will therefore need to follow all the procedures related to approval of a new home loan including credit appraisals, legal verification of property credentials, technical evaluation by the new bank, etc. The loan transfer will depend on these conditions being met.

Processing fees and other charges: Loan transfer involves processing fees to be paid to the new bank. This could range between 0.25 to 1.5% of the home loan principal that is transferred or it could be a fixed processing fee. Some banks also levy administrative charges, legal charges, stamp duty and other miscellaneous charges. It makes sense to compare the total of these charges against the benefit of the reduced interest rate.

Time taken: The process of transferring a home loan takes approximately two weeks, provided all documents are in order.

How much can you actually save?

Suppose you have an outstanding home loan of Rs. 50 lakhs with 14 years left on your loan tenure (original tenure of 20 years) and your rate of interest on the loan is 11%. Now if you transfer to a new home loan provider that charges 9.45% on the outstanding amount, following are the savings you look at:

Home Loan Amount Outstanding	Current Rate of Interest	Tenure Remaining on home loan	Rate of Interest after transfer	Total Savings over Remaining Loan Tenure (14 years)
Rs. 50 lakhs	11%	14 years	9.45%	Rs. 7,86, 639

Key Factors to Consider Before Transferring

Savings versus transfer cost: The most crucial factor when considering a home loan transfer is to check how much you will actually save with the lower interest rate. Weigh the transfer cost to be paid against the amount you will save over the remaining home loan tenure by performing the home loan balance transfer.  If you see that your savings will be significantly higher than the cost of transfer, the switch makes sense. Also bear in mind that while the cost of transfer is payable immediately, the savings will span across several years. The rule of thumb is – a home loan balance transfer during the initial years of the loan generates more savings than a similar transfer performed towards the end of the home loan tenure.

Lookout for Teaser rates: While transferring your home loan, carefully check the new lender’s terms and conditions and ensure the lower interest rate is not a short-term promotional offer. Teaser rates are quite common these days and as the teaser rate is only available for a limited period, you may end up paying a much higher interest rate on the home loan balance amount once this teaser offer ends.

Timing of the switch: It is better to switch the home loan in the early tenure of the loan. If you transfer your loan three or more years after taking the loan, it makes little sense to transfer since you have already repaid a significant part of the interest component, and it is likely that in the transfer process, you end up paying a higher amount towards fees and other charges.

Conclusion

The old adage might go as “a penny saved is a penny earned”, but in the modern age, simply generating savings is in fact not enough. Once you have generated these savings, you should focus on making your money grow and one of the best ways to use the power of compounding to your advantage is to use your savings to invest in a SIP that can provide you with a building block for your retirement fund.

It is always best practice to conduct a detailed analysis of the above-mentioned factors, and assess as well as compare the cost of transfer and potential savings among all available options before you finalize your choice. If you feel that you could save a sizable amount of money in interest payments by performing the home loan balance transfer and also get other major benefits, then a switch is definitely recommended.