Financial implications of a home loan have their ups and downs. No matter how much research you do before opting for one, its long tenure may lead to a situation where prevailing interest rates may be significantly lower or higher than your home loan rate. To seek benefits of a lower interest rate scenario due to improved economic conditions, a home loan borrower may opt for the balance transfer option or even consider renegotiating the home loan with the existing bank.
Here is an active comparison between the two to help you choose the best case scenario to achieve lower interest rate benefits.
Understanding home loan balance transfer
Home loan balance transfer option allows you to seek a home loan from a different lender at lower interest rates than your ongoing loan. The new lender approves the loan request as a new loan and pays the outstanding loan amount to the current bank. All future EMIs are paid to the new lender as per the home loan interest rates at the time of seeking the new loan. Effectively with a home loan balance transfer option, you close your older loan and seek a fresh new home loan with a different lender at lower interest rates.
Working overview of home loan balance transfer
A home loan balance transfer is like refinancing your home loan completely. To facilitate a home loan refinance you need to talk to your existing lending bank and seek a no objection certificate for a loan transfer. The bank will give you a No Objection Certificate (NOC) along with details of the outstanding loan amount. On submission of the NOC and outstanding details to the new bank, payment will be made to the older bank if the loan is approved. The older bank will destroy all your post dated cheques, and all new EMI payments are to be made to the new lending bank.
Reasons why you should or should not consider a balance transfer option
Opting for a balance transfer option may appear to be a beneficial move especially if there is a vast difference in interest rates. The move however may not always be a beneficial one. The new bank considers the loan request as a new loan even if you as a borrower may think of it as a loan transfer. As a result the new bank charges loan processing fee, legal fee, valuation fee, other stamp duty and associated charges increasing the cost of the loan.
Ideally a balance transfer option works to the benefit of the borrower only if the loan is in its initial period of 4 to 5 years since the interest component of EMI's being paid is the highest in the initial years. For loans in mid tenure or nearing the end, a balance transfer option can actually work against the borrower financially since they would have already made the higher interest rate repayment charges to the bank.
Renegotiating home loan with the current lender
Compared to a home loan balance transfer, renegotiating with your existing lender may sometimes work as a better option. If you have been paying regular EMIs without default and have a good credit history and working relationship with the bank, there is a good chance that the bank may consider an interest rate reset request for your loan. In such a scenario you have the option of either request for a reduced loan EMI or increase in the loan tenure to reduce effective EMI as per your financial preference. With no extra loan processing charges, such a renegotiated loan can actually be more pocket-friendly in the long run.
Conclusion: A balance transfer option should be considered only if the current lender does not agree for any negotiation, there is a significant difference in interest rates and the loan is in the initial phase to be a cost effective solution.
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