Understanding Home Loan Transfer Charges: Hidden Costs Unveiled

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home loan balance transfer

Any bank or NBFC that you apply to takes into consideration various factors while deciding the home loan interest rate to be extended to a loan applicant. Their credit score, job and income stability, debt-to-income ratio, and LTV ratio they had opted for, all play a key role in helping the lender decide the latest home loan interest rates that can be offered to a loan applicant. If one wants to avail of low interest rates on an existing home loan, one can transfer the balance to a new lender. This article discusses what a home loan balance transfer is and the charges involved in it.

What is a Home Loan Balance Transfer and How Does it Work?

Home loan balance transfer is a facility offered by the majority of banks and NBFCs these days. Using this facility, individuals currently repaying a home loan on terms and conditions they find disagreeable can get the remaining balance on their home loan account transferred to another lender who has agreed to refinance their loan on terms and conditions that the borrower finds desirable. 

Home loan balance transfers have been made possible by RBI’s mandate that allows home loan borrowers on floating interest rates to foreclose their loans at any point in time without paying any fees or penalties. Thus, when one applies for a home loan balance transfer, the new lender they have applied to pays off the current lender and forecloses the loan applicant’s old home loan account. The borrower then opens a new account with another lender and starts paying loan EMIs on better loan terms and conditions. However, only borrowers on floating interest rates can foreclose their loan account without paying any penalty; borrowers on fixed interest rates are required to pay a penalty if they foreclose their loan account. This penalty can sometimes be as high as 2% to 3% of the loan amount. 

Let us now talk about home loan transfer charges and things borrowers must keep in mind when deciding to balance transfer their home loan to another lender.

Home Loan Transfer Charges 

Here is the most important thing that individuals applying for a balance transfer must know: while your current lender cannot levy a foreclosure penalty if you are on floating interest rates, the new lender you have applied to will treat your home loan balance transfer application as a new loan application and levy a balance transfer fee. The home loan balance transfer processing fee varies from lender to lender and can range from 0.25% to 2% per annum. Thus, home loan borrowers should avail of the home loan balance transfer facility after doing a thorough cost-benefit analysis. If your current lender is levying a penalty and your new lender is applying the home loan balance transfer fee, there must be a significant difference in the old and new home loan interest rates for the home loan balance transfer to make sense.

To make life simpler, consider using a home loan balance transfer calculator, which is an online tool that lets borrowers calculate the money they will save by switching lenders. The home loan balance transfer calculator will also give you your new EMIs, thereby allowing you to get a clearer idea of how much money you will save each month by switching to a lower interest rate. Further, do keep in mind that when opting for a home loan balance transfer, your lender will give you the option to avail of a top-up loan. While a top-up loan can help you take care of immediate financial needs, it will also increase your EMI burden and may make loan repayment difficult. 

Final Words

The home loan balance transfer facility is highly beneficial, however only when opted for after carefully weighing both the pros and cons and doing a thorough cost-benefit analysis.