In 1991, the erstwhile Indian Prime Minister PV Narasimha Rao ushered in policies that formed the cornerstone for India’s burgeoning economic growth. Dr. Manmohan Singh, the then finance minister working under the old stalwart, liberalised our economy and opened the country to foreign and private investments in a bid to spur development. Of the many sectors that mushroomed due to this reform, the housing finance industry turned out to be one of its biggest revelations.
Thanks to the legislation, home loans have become more affordable, now more so than ever, with people being able to get them with as little as 8% p.a. interest rates. As the finance industry has evolved, another concept called home loan balance transfer is gaining precedence. In this article, we are going to talk about some key details regarding this novel concept and how it could benefit you.
Home Loan Balance Transfer– What is it?
Home Loan Balance Transfer (HLBT) is a scheme offered by almost all banks and NBFCs in the country, which allows people to transfer their home loan from their current bank to a different lender. Opting for one helps them receive the benefit of low interest rates, while also giving them better terms and conditions to deal with.
In this section, we will talk about all the pros of opting for a HLBT.
● Low interest rates
Let’s face it, when you have a home loan, up to 50% of your monthly income goes in paying the EMIs on the loan. And if you are one of those that opted for a loan at least five years ago, chances are that you had to contend with home loan interest rates more that 10.25% p.a. Considering that most PSUs and privatised banks are now offering loans as low as 8.3% p.a., paying anything more is a waste of resources.
● Prepayment options
When a customer prepays a loan they borrowed ahead of term, the lender often loses out on interest. To balance this out, they often charge prepayment charges or penalties. However, these charges are slowly turning into a thing of the past, as most of the banks these days are offering minimal to no prepayment options. Going by the adage, money saved is money earned, any money you don’t pay is good for your saving account.
● Lower EMIs
One of the main reasons people look to transfer their loans is because of high EMIs, which tend to become a burden. A balance transfer done right will lower your EMIs by as much as 5%. Now imagine, 5% every month for a 10-year term is a significant sum and it can be put to use for something important in your life.
● Better top-up options:
With better interest rates and easily affordable EMIs, having a home loan balance transfer will also increase the top-up loan amount you are likely to get.
Tips to follow while opting for a balance transfer
There are plenty of things that you might need to follow before going forward with a HLBT. Here are a few of them:
● Check the tenure
Home loan balance transfers work well for you if you opt for it when you have a lot of years of loan to repay. For instance, if you have a 25-year loan and have already paid EMIs for over 20 years, the hassle of going for a HLBT isn’t worth it for you as you won’t be able to get the maximum benefit through the process.
● Make a note of the charges
Before going for a home loan balance transfer, you need to pre-close your existing loan, and this will be done through the loan you get from your new lender. As banks weren’t as flexible as they are now, you will most likely be charged a prepayment penalty which ranges from 1.5% to 2.5% of your unpaid principal amount on your loan.
● Calculate how much you can save
The whole point of a balance transfer is to help you save money on EMIs. If it doesn’t help you save, then there’s no point going for it in the first place. So, use a home loan EMI calculator and find out how much you will be able to save. To do this, check the total principal and interest you have to pay, now compare this with the new loan you are getting and the EMIs you will pay.
Also, factor in the prepayment charges if there are any. Once you have all the numbers, calculate if the expense from your old loan beats the one with the new loan.
● Compare lenders
Interest rates on home loans these days are rather affordable compared to the last few years. So, before opting for one, make sure to compare different lenders to find the best rates for you. While doing so, take a look at any processing charges they might levy on the loan. A tip for you would be to go for such loans during the festive season, as this is the time when banks will be looking to attract more customers and hence will offer better deals for you.
All in all, a home loan balance transfer will help you save money and avail loads of other benefits. But, you need to exercise a bit of caution before opting for it in order to get the best out of it.
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