Suppose you took a home loan of INR 30,00,000 at 9% pa (fixed rate) for 20 years in September 2018. The pandemic era followed, and you continued paying the EMI.
From February 2019 to May 2020, the RBI reduced the policy repo rate by 2.5%. If you had taken a home loan in June 2020 from the same lending institution, the interest rate would have been 6.5%.
To your dismay, you already took a home loan! However, you still have a chance to avail this lower interest rate through a home loan transfer.
In a home loan balance transfer, you foreclose your outstanding home loan and transfer the remaining principal amount to another lender at a lesser interest rate. The new lender pays the remaining principal on your behalf, and your EMI obligations will now be to the new lender.
But how will a home loan balance transfer benefit you? Let’s figure it out!
Ease Your EMI Pressure
Let’s go back to the story. You started paying INR 26,991.78 as your EMI in September 2018 against INR 30,00,000 at 9% pa (fixed). In May 2020, you completed 20 EMIs worth INR 5,39,835.6. You paid INR 4,43,301.77 as interest, and the balance principal is INR 29,03,466.20.
Now you tracked the changes in monetary policies and decided to transfer your home loan balance of INR 29,03,466.20 to another lender.
Your new home loan is INR 29,03,466.20 for 220 months (as you have already paid 20 EMIs) at 6.5% pa (fixed). Consequently, your new EMI will come down to INR 22,618.94, Rs. 4,372.84 less than your previous EMI.
Therefore, a home loan transfer will help you ease EMI pressure and, sometimes, help you save a lot.
Save Tremendously in Interest Payments
If you continue the existing loan, you must pay INR 34,78,026.88 as interest in 240 months. As of May 2020, you already paid INR 4,43,301.77 as interest, and the interest due is INR 30,34,725.11.
If you transfer your home loan, your total interest payable will reduce to INR 20,72,700.40. Compared to the interest due on the previous loan, you save INR 9,62,024.71 against interest payment.
Therefore, a home loan transfer will help you save a significant amount in interest payments. Money saved is money earned!
Flexible Repayment Tenure
You can further reduce the EMI (by increasing the tenure) or pay off the loan quickly (by reducing the repayment tenure).
For instance, if you increase the new tenure to 25 years, your new EMI will be INR 19,604.41. However, the new interest outflow will pro-rata climb to INR 29,77,857.31. Nevertheless, this figure is slightly less than the interest due against your previous loan. In other words, you can enjoy a significantly less EMI (INR 7,387.37 less) at more or less the same interest outflow.
What if you reduce your tenure to, for instance, 162 months? In this case, your EMI will be INR 26,967.25 (not much different from the existing EMI), but you can pay off your debt 58 months (approximately five years) early. In other words, you can continue paying more or less the same EMI against a reduced repayment tenure.
Moreover, in this case, the total interest outflow will reduce to INR 14,65,227.54, and your total savings on interest will increase to INR 15,69,497.57.
You can enjoy benefits such as a top-up loan while you transfer your home loan. Most financial institutions will offer you an additional amount over your transferred home loan at the same interest rate.
And the best part is that you can use it for any purpose. You will get this new sum at an interest rate up to 3% less than personal loans.
Moreover, if you use this new amount for home renovation/extension or related activities, you can claim tax benefits of up to INR 2 lakhs on interest payments under sec. 24(b) of the Income Tax Act.
Is a Home Loan Transfer Worth It?
So, is a home loan transfer worth it? The answer partly depends on the existing loan tenure.
You repay a significant portion of the interest component in the initial years. For instance, consider a home loan of INR 30,00,000 for 300 months at 7%. You pay almost half the total interest component by the 35th month and 70% by the 155th month. Therefore, a home loan transfer will benefit you only in the early stages of the loan tenure.
Moreover, you have to bear some extra charges during a home loan transfer like:
- Foreclosure fee (2-5% of the loan amount)
- Balance transfer transaction fee (0.5-1% of the balance principal).
- Stamp duty fee and other charges as the new lender will consider the balance transfer application as a fresh one.
Therefore, you must do a thorough cost-benefit analysis before transferring your home loan. Also, you must deduct these extra charges from your total savings to see if a home loan transfer is worth it.
Wrapping It Up
Finally, a home loan balance transfer is prudent if you are in the early stages of your home loan tenure.
If another lender is ready to offer you a home loan at a significantly lesser interest rate or if the economy’s health demands a lower interest rate, continuing to repay your existing home loan at a higher interest rate makes no sense.
However, while considering a transfer, ensure that you do a proper cost-benefit analysis to see if the transfer will help you save a considerable amount. Also, if your existing lender is open to negotiations and ready to reduce the home loan interest rate on the outstanding loan, you can go with it!