Are you feeling the pinch of your home loan EMIs or equated monthly instalments? If yes, then you can lower the rate of interest of your home loan by transferring it to another institution. Balance transfer or simply transfer means shifting an existing loan to another lender by paying off the previous lender in full, and starting to pay the EMIs to the new lender at the new interest rate. Although all types of loans, e.g. personal, auto, education or home loans, are eligible for transfers, home loans remain the most ideal for a transfer as the quantum and the duration of the loans are higher and even a small change in interest rates can result in significant savings, say experts.
One can start looking at transfer of his/her home loan if one is not satisfied with services of the existing lender, for instance, if a bank is slow to react in reducing interest rates when the Reserve Bank of India (RBI) reduces the policy rates. "There are instances where the RBI had reduced the repo rates significantly but on an average only half of the benefit of this reduction was passed on to the consumer by the banks, says Rahul Agarwal, director, Wealth Discovery/EZ Wealth.
A borrower can reap maximum benefit on a home loan transfer if the remaining tenure of the outstanding loan is higher, e.g. if the borrower has only paid off two years of an existing twenty-year home loan. For longer duration loans, even small a difference in the interest rates can result in aa significant amount of savings (table), says Mr Agarwal.
|TRANSFERRING OF HOME LOAN|
|Current Loan (Rs)||50,00,000|
|Rate of Interest||10%|
|Current EMI (Rs)||48,251|
|Case I - Transfer after 2 years|
|Balance Principal to be Transferred after 2 years||4,825,863|
|Total Cost of Transfer (1% Processing Fee & Rs 3, 000 Misc. Fees)||51,259|
|EMI at Lower Rate of 9.00%||45,192|
|Difference Between Two EMIs||3,059|
|Case II - Transfer after 15 years (5 years remaining)|
|Balance Principal to be Transferred after 15 years||22,70,955|
|Total Cost of Transfer (1% Processing Fee & Rs.3, 000 Misc. Fees)||25,710|
|EMI at Lower Rate of 9.00%||47,141|
|Difference Between Two EMIs||1,110|
Apt time to transfer home loan
"From the example discussed above, it is amply clear that transferring existing home loans towards the far end of the loan's tenure is not advisable," says Mr Agarwal. Any refinance exercise should only be undertaken if the present value of the interest rate savings is higher then the upfront cost because even though there would be a difference in the interest rates, the savings are just not significant enough to be worth the hassle a home loan transfer entails, he adds.
Counter offer from existing institution
Since banks are barred from levying any foreclosure charges or prepayment penalties on transfer of floating rate loans, it always works out in the customer's favor, according to Mr Agarwal. However, from a bank's perspective, losing any client is bad business as there are significant costs incurred in the acquisition of accounts, therefore in all possibilities, banks do offer counter rates or try to match competing offers to retain their client base.
Factors considered for loan application
"For credit institutions disbursing home loans, the two most important things while assessing the risk of a particular loan are the probability of repayment and the liquidity of the collateral in case of a default. When it comes to home loans, in addition to the credit profile of the borrower, the type and location of the property is an important criterion while making a credit decision," says Mr Agarwal.
Some of the common measures that banks use while assessing a home loan application are:
Credit history: An applicant's CIBIL score is considered the most important benchmark and generally a score higher then 800 is considered excellent, and one between 700 and 800 is considered good.
Occupation: Banks generally prefer some occupations over others which are considered more stable in nature, such as jobs in government sector and PSU banks. Employees working in multi-nationals, and occupations like doctor and chartered accountant are also favorable from the bank's perspective, say experts. People working in private companies and self-employed individuals get the lowest preference.
Age: Generally, younger people (in the age group of 30-50 years) are most preferred candidates as they are considered more financially stable and have more working years ahead of them.
Repayment period: Long duration loans bring uncertainty of time, therefore banks are more comfortable in disbursing loans for a short duration. Banks prefer people who opt for a repayment period of up to five years, and the weightage falls to half if the repayment is between 10 and 15 years, and is the lowest for a repayment period of 20 years. What it means is that opting for a shorter duration increases your chances of getting a home loan application approved.