The huge surge in bank deposits due to demonetisation has led to banks reducing lending rates to the lowest in the last 6 to 8 years. Leading the pack, is SBI which has reduced its home loan rates by 50 basis points (bps) to as low as 8.5 per cent (fixed). Even, HDFC, the largest NBFC in the home loan segment, has reduced its home loan rates by 45 bps. However, as the rate cuts will primarily benefit fresh borrowers, many existing home loan borrowers would be considering a home loan balance transfer to make the most of the low interest rates.
Here are some factors that would help you decide whether you should opt for a home loan balance transfer now:
Savings on interest payouts: For most people, savings is the main reason for transferring their home loans. However, opt for a home loan balance transfer only if the total savings in interest payout is substantially higher than the cost incurred while transferring the loan. Usually, the new lender will charge various fees, such as conversion fee, processing fees and administrative charges during the loan transfer.
Remember that the earlier you transfer your home loan, the higher will be your savings in your interest payout. For example, assume that you have Rs 50 lakh home loan of 20 year tenure @ 9.1 per cent with just 3 year left to pay. If you transfer it to a lender offering @ 8.6 per cent interest rate, your total savings in EMIs will be Rs 11,901 only. However, if someone transfers the same loan amount of same tenure at same interest but with 15 years left to pay, he will save Rs 2,36,748 on his interest payout. Therefore, avoid loan transfer when your loan is in the last leg of its tenure.
Switching to MCLR-based loans: Currently, only banks provide MCLR-linked loans. Compared to RPLR and base rate system, MCLR regime has a more transparent rate-setting mechanism. The probability of policy rate transmission is also higher with the MCLR regime. Although, RBI has directed banks to allow their base rate borrowers to migrate to the MCLR system, housing finance companies (HFCs) and other NBFCs do not come under the purview of MCLR. Therefore, transfer your home loan to a commercial bank if the difference between your existing rate of your NBFC loan and the rates offered by banks is significant. Switching to MCLR will increase your probability of benefiting from future rate cuts.
Non-approval of top-up loans: Banks and NBFCs offer top-up loans to their existing home loan borrowers when they need funds over and above their existing loan. These loans are similar to personal loans and the loan amount can be used for any purpose — like renovating your home, medical expenses or even for buying consumer durables. Their interest rates are also usually lower than that of the personal loans. Transfer your existing home loan if your current lender is not approving a top-up loan or charging a higher interest on the top-up loan.
Renegotiation of terms and condition: Transferring your home loan to a new lender is similar to availing a fresh loan, where the new lender will have its own set of terms and conditions. You can use it to re-set your loan EMI and tenure and top up as well. Opt for a home loan transfer if your existing lender is not allowing you to reset the terms and conditions of your loan. You could visit online financial marketplace such as www.paisabazaar.com for comparing and choosing amongst various balance transfer options.
Currently, home loan balance transfers will be especially beneficial for those who have a long tenure left for loan repayment. As there is room for further policy rate cuts in near future, borrowers under the base rate system should either switch their loans to MCLR regime or transfer to a bank offering better rates at better terms and conditions. Home loan borrowers from housing finance companies can also consider to transfer their balance to commercial banks as that will bring them under the purview of MCLR regime. However, ensure that the benefits of transferring loans significantly outweigh the cost involved.
By Ajay Mishra, Vice President & Business Head- Secured loans, Paisabazaar.com
