The technical term for a loan transfer is ‘takeover of loan’. You approach a bank. It pays up for whatever remains of your loan amount to your former bank. Then, it issues a loan to you on the same amount, but with new interest rates and tenure.
This transaction lets you choose lower interest rates and pay less EMIs. It brings extra business to the bank. Sounds like a win-win? It is!
However, the rate of interest and monthly installments, as relevant as they are, shouldn’t be the only things you consider before choosing an alternative to transfer home loan balance. Here are six other factors that you must explore and weigh before making a decision.
- How Much Would a Loan Balance Transfer Help You with Long-Term Savings?
The whole point of shifting loans is to relieve the pressure of higher EMIs and keep you from overpaying. A cost-benefit analysis becomes necessary here. Whether or not you will benefit from transferring the loan depends on four factors.
- The outstanding loan balance.
- The remaining tenure of the current loan and that offered by the new bank.
- The transfer cost of the new bank.
- The applicable rate of interest.
Let’s assume that you take a loan for ₹50,00,000 for twenty years at 9.70 percent per annum interest. You still have fifteen years left on the tenure. You pay ₹47,262 as monthly EMI and have an outstanding amount of ₹44,74,000. If a bank offers you 8.65 percent per annum with a cost of ₹13,000 for transfer and a difference of ₹2,813 in the EMI, you will save ₹4,93,000 after repaying the loan with the new bank.
For the same loan, if the remaining amount and tenure are ₹22,39,000 and five years respectively, at 8.96% p.a. and new EMI of ₹1,153, you will only save ₹58,340. With the transfer cost of ₹10,840, processing fee, administrative charges, and switch-over free, it may not be a beneficial deal.
For a shorter tenure or small remaining balance, switching banks may not give you any significant profit. Use any bank’s online home loan transfer calculator to find out how much you will be saving.
- What Are the Correct Collateral Adjustments?
Having something to put up as collateral is an essential part of housing loan eligibilities. When you switch banks, it is not wise to offer the whole original insurance to the new lender.
Transferring a loan is very much like taking a new loan to pay an old one, albeit with some benefits. However, the amount you owe could get reduced because of the rate of interest. It’s why you should offer a part of the original collateral or some other security which is lesser in value.
- How Much Will the Switching Costs Put You Back?
Transferring home loan balance is a time-taking process. The bank may also charge a processing fee or a switch-over fee. Additionally, the legal fee, valuation fee, conversion fees, stamp duty, technical costs, and any tax related to documentation.
- Are There Any Allied Account Requirements?
A bank may require you to create a savings account with them if you wish to avail their loan service. During home loan balance transfer, you must inquire any charges and the offered facilities regarding the same.
Also, if all your banking is managed elsewhere, getting a new account and understanding how the new lender bank operates may be a hassle you don’t want to tackle at present.
- What Does the Fine Print Say on the Contract?
It is recommended that you go through every term and condition if you want to avoid being trapped in the web of technicality.
If the new lender is offering incredibly low interest, what is in it for them? If it turns out to be a short-term offer for promotions, you will have a hard time proving that the bank conned you. If the lower interests are a part of teaser loans, they will get higher in the later years, knocking off chances of any savings you had planned.
- Don’t Hurry
Comparing your existing bank’s offers with any new lenders is also a good way to determine how good a deal you are getting. Since switching banks to transfer home loan balance takes time and clean paperwork, you must compare, read through, analyze, and take your time to come up with a decision.
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