Home loans can continue for decades, even spanning half of your earning life! This means you could contribute a significant portion of your earnings towards your home loan EMI every year. Interest, principal amount and loan tenure are key components of a home loan EMI. In the beginning of the loan tenure, interest payments makes a larger component of repayment than the principal does. Changes in interest rate or the tenure of your loan can bring a huge impact on the loan EMI.
Therefore, borrowers often use the facility of balance transfer, which enables you to transfer your home loan to another lender who is offering a lower interest rate and better terms.
How does home loan balance transfer work?
When you transfer the loan, the new lender pays the balance amount of the loan to your old lender, and you start paying the EMI to the new lender as per the interest rates offered.
Though it sounds easy and profitable, you should keep a few things in mind. Here are 5 things that you should consider before transferring your home loan.
Transfer at the beginning of the loan
In the initial years, the interest payment on your EMI is higher than the principal component of the loan. So, if you wish to transfer your loan, it is suggested doing so when at least 5 years of your loan repayment tenure is left. When you transfer your loan, you might have to bear a few charges like loan processing fees, transfer fees, etc. So, transferring your loan when almost the entire tenure has already passed might not be economically feasible for you. On the other hand, when you transfer your loan early during the tenure, you might be able to reduce the cost of your borrowing through the balance transfer loan.
Check the credibility of the lender
Before you choose your lender, ensure that there’s no sudden dip in the approval amount by the lender post your home loan eligibility calculation. Keep in mind that credible lenders give clarity at every stage. To further give you an idea, you can also read online reviews and read the documents carefully before making the commitment.
Know about the other charges
The new lender could levy various charges on transferring the loan. It is important to know about these when you plan to transfer your loan as those charges could increase of the overall cost of borrowing. Along with the fees like stamp paper fees, documentation charges, processing fees, you should also enquire about any hidden charges and fees.
Ensure timely payments – Pay EMIs on time
You might face difficulty in transferring your loan if you default on EMI payments. If your credit score falls after you have taken the home loan, the new lender might reject your loan transfer request. So, if you plan to transfer your loan, it is important to pay all your EMIs on time, improve your credit score and then apply for a loan transfer.
Negotiate the loan processing fee
Your decision about transferring your loan must be profitable for you. Therefore, you should compare your options and look for a competitive home loan balance transfer interest rate. Once you zero down on a lender, you can negotiate for a low loan-processing fee. Considering your credit score, they might even waive off the processing fee if you have made timely EMI payments in the past.
You can opt for transferring your loan to a new lender if you get favorable interest rates and terms. But for that, you must have a good credit score and track record. Before you jump on the decision to transfer a loan, consider the above factors and then make an informed decision.