Rising home loan rate: How home loan balance transfer can come to your rescue

Naveen Kukreja

With the RBI announcing a repo rate hike, there are growing concerns among home loan borrowers about a rise in their cost of EMIs. While there may not be any immediate rise in their existing loans’ rates, it may be worthwhile for home loan borrowers to consider a home loan balance transfer to save money on the loans.

What exactly is a home loan balance transfer?

Home loan balance transfer is offered by most lenders, which involves transferring your existing outstanding home loan balance from current lender to a new lender, for better services or lower rates. There may be various scenarios wherein an existing home loan borrower may consider opting for a home loan balance transfer:

Switching to MCLR based rate regime

RBI had mandated banks to follow the Marginal cost based lending rate (MCLR) based interest rate-setting system since April 1, 2016. As compared to the prime lending rate (PLR) based rate regime followed by NBFCs and HFCs, MCLR mechanism offers more transparency along with higher transmission of policy rate’s benefits to borrowers.

Moreover, presence of the concept of pre-set loan reset dates in the MCLR regime ensures that borrower’s interest rate remains unchanged till the next reset date, despite changes in the existing lender’s (bank) lending rates during the interim period. Hence, this reduces the borrower’s interest cost during a rising interest rate scenario, especially for those who have opted for a longer reset period.

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Therefore, existing home loan borrowers who are servicing loans from NBFCs and HFCs may consider opting for MCLR based rate system by transferring their current home loan to a bank offering better rates and terms of service.

Overall Savings in interest payout

In most cases, the prime reason for borrowers to opt for home loan balance transfer is to reduce total interest payout on outstanding loan amount, through lower interest rate being offered by another lender. However, before finalizing your new lender on the basis of interest rate being offered, make sure you take into account other fee and charges involved.

Whenever you apply for a home loan balance transfer, the new lender considers this as a fresh loan application, and therefore levies various charges and fees, such as processing fee and administrative charges. Therefore, consider these charges while calculating total savings on your interest cost, and go ahead if the overall savings are substantial. Or else, continue with your existing lender.

Failed renegotiation with existing lender

In case you aren’t satisfied with your current lender or your existing lender has refused to accept your request to lower interest rate or provide better terms of service, you may consider switching your lender by opting for a home loan balance transfer. When you apply for balance transfer, your new lender would be imposing its own set of terms and conditions. Before you finalize the new terms, use this balance transfer as a new opportunity to either avail a larger loan amount or reset your loan tenure as per your requirement.

Top up loan requirement not met

Top up loan is a loan amount granted over and above your existing outstanding home loan amount. Most lenders offer this facility to borrowers, for various purposes such as home renovation, child’s higher education or meeting medical expenses. Top up loans are similar to personal loans, since these generally do not involve any restriction on the fund’s end use. Moreover, top up loans’ interest rates are usually cheaper than most secured loans and even personal loans. Additionally, funds acquired from top up loans may also be considered for consolidating your existing debt.

Therefore, home loan borrowers whose existing lenders either do not offer top up loans or have rejected borrower’s request for top up loan may opt for balance transfer to fulfill their requirement for additional funds. Moreover, in case the top up loan amount sanctioned doesn’t suffice, you may consider transferring your current home loan balance to another lender who offers you sufficient top up.