What Is a Home Loan Transfer?

A home loan is valuable for securing funds during a home purchase or construction. Yet, dissatisfaction with loan terms can arise. Many banks now provide flexible repayment tenures. However, opting for a Home Loan Balance Transfer with the appropriate bank can simplify the repayment process.  This article explores this transfer in-depth; let’s look into what a home loan balance transfer is.

What Does Transferring a Home Loan Involve?

A home loan balance transfer, or home refinancing, is when you shift your existing home loan balance from one bank to another. This is done to benefit from more flexible repayment options, such as better interest rates, extended tenure, or improved facilities offered by the new bank. Once you choose a new bank, they pay off the remaining amount to your original bank. The new interest rate can lead to savings on monthly instalments (EMIs) and overall interest expenses for the borrower.

Cost of Balance Transfer

Balance transfer comes with associated costs from both your current and new lender. The process incurs charges like processing fees, legal fees, and technical and valuation fees. Typically, banks charge processing fees ranging from 0.50% to 1%, and stamp duty costs around 0.20% to 0.50%, depending on the location. 

It’s necessary to consider these expenses when contemplating refinancing, ensuring they don’t outweigh the potential savings from a lower interest rate. While this home loan settlement may involve some paperwork and costs, carefully reviewing guidelines and fine print is essential to uncover hidden charges and make an informed decision.

Key Documents Required for a Home Loan Balance Transfer 

For a home loan balance transfer, you need to provide:

1. Property documents held by the current lender.
2. Loan statement copy, preferably attested by the bank.
3. Bank statements from the last 12 months showing EMI deductions.
4. No objection certificate or consent letter from the existing bank.

Additionally, the new bank will require:

1. Income statements, salary slips, and Form 16.
2. Latest Income-Tax Returns.
3. Age proof (Aadhaar, Passport, PAN card, Driving License, etc.).
4. Address proof (Aadhaar, Passport, Driving License, utility bills, etc.).
5. Photo identification proof (Aadhaar, Passport, PAN card, Voter ID, Driving license, etc.).

When to Consider Home Loan Balance Transfer?

Before shifting your home loan settlement, consider factors such as your current bank’s interest rate policy and its linkage to external benchmarks. Since October 2019, the Reserve Bank of India has mandated Indian banks to link floating interest rates to external benchmarks, giving borrowers transparency on rate fluctuations. Assess the suitability of a switch by monitoring the rise and fall of rates.

Below are the guidelines for timing a balance transfer:

1. For a 20-year home loan tenure, consider switching if there’s a remaining tenure of 15 years and a difference of at least 25-50 basis points (bps) compared to your existing bank.
2. If the remaining tenure is between 10-15 years, it is better to transfer if the new bank offers an interest rate difference of about 50 bps. This is crucial, especially in the initial years when you pay off most of your principal amount.

Eligibility Criteria for Home Loan Balance Transfer

Before considering a home loan balance transfer, it’s essential to understand the eligibility criteria. Borrowers can typically opt for a balance transfer after making at least 12 EMIs on their existing loan, although some lenders may allow 6-12 EMIs. 

However, there should be no default in the payment of existing EMIs. For properties under construction, proper documentation is necessary for approval by the new lender.

Some key eligibility criteria are:

1. 1. Age: Typically between 23-70 years.
2. Stable Income: Individuals with a stable income are considered low-risk and more likely to be eligible for home loan financing.
3. Loan-to-Value (LTV) Ratio: A factor in determining eligibility.
4. Necessary Documents: Bank statements for the last 12 months showing EMI deductions, “no objection certificate” from the existing bank, and address proof.

How to Calculate EMI for Home Loan Balance Transfer?

The potential savings from a home loan balance transfer depend on:

1. Outstanding principal amount of your current home loan.
2. Current monthly EMI payment.
3. Remaining tenure of the existing loan (in months).
4. Interest rate offered by the new lender for the balance transfer.
5. Required tenure in months for the new balance transfer home loan.

For instance, if your outstanding principal is ₹30,00,000, the current monthly EMI is ₹35,000, the remaining tenure of the current loan is 180 months (15 years), the new lender offers an 8.5% interest rate, and the required tenure for the new loan is 180 months, you could save ₹7,20,000. Your monthly EMI would decrease from ₹35,000 to ₹30,800.

The total payment would reduce from ₹63,00,000 to ₹55,80,000. Opting for a shorter tenure may not result in significant savings, but you can pay off the loan faster while maintaining a similar EMI as your existing loan.

What to Consider Before Transferring Home Loan between Banks?

When contemplating transferring a home loan from one bank to another, it’s crucial to factor in processing charges and balance transfer fees. Only if the new bank’s interest rate, combined with these extra charges, proves to be more cost-effective than the current loan, should a customer decide to refinish the loan.

Reasons and Timing for Choosing a Home Loan Balance Transfer

Why?

1. If you’re currently paying a higher interest rate with your current bank, a home loan balance transfer to a bank offering a lower rate can be advantageous.
2. When your existing bank refuses to lower the interest rate, even with a good relationship.
3. If other banks are providing lower interest rates.

When?

A home loan balance transfer is viable for 12 to 18 months after diligently repaying your current housing loan.

Differences Between a Home Loan Balance Transfer and a Home Loan 

• Home Loan Balance Transfer: Transferring an existing home loan to another bank with a lower interest rate. This option becomes feasible 12 to 18 months after faithfully repaying the current housing loan.
• Home Loan: A loan acquired from a bank or financial institution to buy a house, construct a property, or renovate an existing one. It involves extensive documentation and verification, making the application approval process challenging.

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