How do you decide when to opt for a home loan transfer? Here are 5 tips

Home loan interest rates are rising again with the recent rate hikes by the US Fed. Apart, the Federal Reserve Chair Jerome Powell has hinted at the possibility of another rate hike in coming September, thus, raising fear of increased loan interest rates, especially, among home loan borrowers.

As of August 1, 2023, ICICI Bank and Bank of India have updated their marginal cost-based lending rates (MCLR) for loans across different durations. Meanwhile, Punjab National Bank has chosen to maintain its basic lending rates at its current level.

It's important to note that MCLR is subject to monthly revisions, with adjustments influenced by factors like the repo rate and other borrowing-related rates.

Higher interest rates often prompt borrowers to seek a home loan transfer wherein they can repay at lower interest rates coupled with a more supportive customer support staff and the hope for better services. While many people typically avoid transferring their home loans unless they face financial difficulties, there are various situations where such a move can be advantageous.

• Lower interest rates: Transferring your home loan to a lender offering a lower interest rate than your current one can result in substantial savings on interest payments throughout the loan tenure. This allows scope for the benefit of reduced monthly equated monthly installments (EMIs), making budgeting and financial management more manageable.
• Flexible terms: Some lenders provide more flexible terms, such as longer repayment periods or the option to make prepayments without incurring penalties or extending the repayment period. This can offer you greater control over your loan and align it better with your financial goals. If you seek increased flexibility in your loan terms, switching to a different lender could be a beneficial choice.
• Better service: If you find yourself dissatisfied with the service provided by your present lender, transferring to another lender can grant you the opportunity to experience improved customer service and support. Indeed, the benefits of transferring your loan may encompass improved terms and conditions, such as flexible repayment options, lower processing fees, or enhanced customer service. When contemplating a loan transfer, it is crucial to thoroughly compare the overall advantages and costs associated with the new loan. This comparison will help you make an informed decision that aligns with your financial goals and requirements.

Other factors including the cost of the transfer and interest rate difference also must be considered before deciding on a home loan transfer. Undoubtedly, transferring a home loan comes with certain potential drawbacks, including closing costs and the risk of facing a prepayment penalty from your current lender. Nevertheless, if you manage to find a lender offering an attractive deal and you are certain about your ability to meet the payments, opting for a home loan transfer could prove to be a prudent choice.

When should you opt for a home loan transfer?

When contemplating whether to transfer your home loan, several crucial factors warrant consideration, with the interest rate being paramount. By finding a lender offering a lower interest rate than your current one, substantial savings on interest over the loan's duration can be achieved.

Alongside the interest rate, these are the other factors to take into account:

• Closing costs linked to loan transfer: Closing costs represent the fees linked to loan transfers, which can fluctuate based on the lender and loan terms. The total closing costs involved in a loan transfer can vary from a few hundred to several thousand rupees. When contemplating a loan transfer, it is crucial to consider these costs and their impact on your decision.

Certain lenders provide no-closing-cost loans, meaning the lender covers all closing costs. However, such loans often come with higher interest rates. Therefore, it is essential to carefully weigh the pros and cons of these options before making a decision.

• Prepayment penalties on loan transfer: A prepayment penalty is a fee imposed by a lender when you repay your loan ahead of schedule. This fee serves to protect the lender from potential loss of interest payments. The specific amount of the prepayment penalty can vary depending on the lender and the loan terms.

However, not all loans have prepayment penalties: Some lenders do not charge prepayment penalties, so it is crucial to review the terms of your loan before considering a transfer.

The penalty is often a percentage of the outstanding loan balance. For example, a lender may charge a two to three per cent prepayment penalty if you repay the loan within the first three years.

The penalty applies only when you fully repay the loan. Making a large prepayment without fully settling the loan might not incur a prepayment penalty.

Also, if you sell your home and the new buyer assumes the loan, the prepayment penalty is often waived. When contemplating a loan transfer, it is vital to consider the potential prepayment penalty. If you anticipate paying off the loan early, opting for a loan without a prepayment penalty may be a more suitable choice.

• New loan tenure: The duration of the new loan is a crucial consideration in the process of a home loan transfer. The loan tenure refers to the period required to repay the loan fully. When transferring your loan, you have the opportunity to alter the tenure to suit your preferences or financial circumstances.

If you are content with your present monthly payments, maintaining the same loan tenure may be preferable. Nevertheless, if your objective is to decrease your monthly payments, opting for a longer tenure could be a suitable choice.

Additionally, the tenure of the loan impacts the interest rate you'll be charged. A longer tenure generally results in a lower interest rate, but it also means paying more interest over the loan's duration.

Furthermore, if you have plans to sell your home in the near future, selecting a shorter tenure might be advantageous, allowing you to repay the loan before selling the property.

• New loan terms and conditions: Negotiating new loan terms and conditions is a possibility during a loan transfer. The specific terms and conditions offered will be contingent upon the lender's policies and the borrower's individual circumstances.
• Your current financial situation: A lot depends on the present state of your finances. Your current financial situation plays a crucial role in the process of your home loan transfer. Lenders will assess factors such as your income, existing debt, and credit score to determine the approval of your loan transfer.

To ensure your eligibility for the loan transfer, lenders will scrutinize various aspects of your financial situation. They will review your income from all sources, including employment, investments, and rental income, to determine whether you have sufficient funds to meet the monthly payments on the new loan.

Additionally, lenders will examine your debt obligations and your ability to repay them, analysing both your total debt and your debt-to-income ratio.

Another crucial factor considered by lenders is your credit score, which reflects your creditworthiness. A higher credit score improves your chances of getting approved for a loan transfer with a more favourable interest rate.

Carefully assessing these factors is crucial when deciding on a home loan transfer. Shopping around and comparing rates from different lenders before making a decision is also vital.

How do you decide on a home loan transfer?

Just because some fintech organization offers loans at comparatively lower interest rates is not enough reason for you to suddenly jump to the decision of opting for a home loan transfer. You must consider the following tips when deciding on a home loan transfer.

• Research extensively on the web: Conduct thorough research before finalizing a home loan transfer. Take the time to compare rates and fees offered by various lenders. Utilize online resources to make informed comparisons and find the most suitable option for your needs.
• Evaluate your financial situation: If you're facing financial difficulties, transferring the loan might not be the best move. It could be wiser to focus on reducing debt and improving your credit score.
• Added loan requirement: During a home loan transfer, certain lenders provide top-up loans that offer additional funds for various purposes, such as home improvements, education, or other needs. Opting for a top-up loan alongside the transfer can be a cost-effective and convenient means of accessing extra funds for your requirements.
• Shop around and compare rates: Obtain quotes from multiple lenders to ensure you're getting the best deal.
• Review the fine print: Thoroughly read and understand the terms and conditions of the new loan, including any fees and penalties.

If you do decide to proceed with the transfer, act promptly to minimize interest expenses on the current loan.

Ultimately, the decision to transfer your home loan is a personal one. By thoughtfully considering all relevant factors, you can make an informed choice that suits your individual needs and circumstances.