Since banks announced a hike in loan interest rates, many borrowers have contemplated transferring their loan balances to financial institutions charging lower interest rates. A home loan balance transfer is a common practice among home loan borrowers who queue up before banks and housing finance companies (HFCs).
The question is “Why to go through the rigmarole of getting a loan transferred from one bank or finance company to the other?” The answer lies in the excess interest that must be paid on account of increased interest rates. Borrowers want to escape the high brunt of interest and that is why choose cheaper financing companies, thus, explaining their balance loan transfer applications. Accepting the loan transfer application means that the borrower will now be subject to the new lender’s terms and conditions apart from opting for a renewed loan tenure, processing fees and other expenses, etc.
Many existing home loan borrowers inquire if it makes sense to opt for the home loan transfer option. If yes, then when should one apply for a home loan transfer is another point that they must consider.
Eligibility at lower interest rates
Banks do not offer home loans at the same interest rates to all their prospective borrowers. How much interest they must pay depends a lot on their creditworthiness. Banks check the credit profiles of their customers before deciding what interest rates they want to charge their customers. Apart, there are various financial and market-based parameters that help decide the interest rates offered to home loan borrowers. The decision to charge a particular interest rate also depends on whether the borrower has sought any other kind of loan(s) and at what interest rates. Home loan borrowers with good credit scores can expect their applications to cheaper banks and lending institutions to be accepted and, hence, can opt for the balance loan transfer.
Improved credit score
Many situations can have a damaging effect on one’s credit profile that can be rectified with corrective measures. Many borrowers end up paying higher interest rates on the loans they seek owing to their low credit scores. Improvement of their credit scores allows them to apply for cheaper loans based on their renewed credit profiles. Banks usually their home loan customers with better credit profiles with lower credit risk premium (CRP) spread.
Balance loan transfer can also be considered by borrowers seeking top-up loans. However, borrowers must have a pre-determined number of equated monthly instalments (EMIs) and a satisfactory repayment history. Lenders in most cases charge lower interest rates for top-up loans as opposed to other kinds of loans including personal loans, loans against securities, etc. This also means that borrowers looking for top-up loans but unable to seek the same at desired interest rates can apply for a loan balance transfer from another bank or a non-banking finance company (NBFC).
Seeking the same loan tenure
A longer loan tenure translates to higher interest outgo. This implies that while seeking a loan balance transfer, you must check if the new lending institution is offering you the loan for the same tenure as before. Inability to pay higher interest results in many borrowers opting for an extended loan tenure. However, this causes them to pay more on the loan amount, thus, impeding their financial goals due to the massive burden of debt. Balance loan transfer suits best only when the loan at the new interest rate is sought for the same tenure, thus, ensuring timely repayment of the loan amount. Existing home loan borrowers realizing the futility of an extended home loan tenure may opt for the balance loan transfer option from a different financial institution or lending company depending on their needs.
