ATM :: Balance transfer – the way forward for home loan consumers

Balance transfer can help you save money on interest and at the same time allow you to raise additional money to retire high cost borrowings such as credit card debt and personal loans.


Electric switch at home gets the lights on, and brightness brings cheer. Switch a.k.a. balance transfer of your home loan is also like that.

First of the month is a great day, salary credited to account and lots of positive mood. But many-a-time the cheer goes away by third of that month itself as equated monthly installments (EMI) have been debited and all the bills have been paid. To protect the lifestyle one has, it is very important to manage the biggest expense every month and WHAT’s THAT? Of course, the EMI(s).

So, finding an alternative lender who is going to give a better deal for the loan makes perfect sense.

Benefits of balance transfer
In the floating return of interest era; lenders are quick to increase the EMI whenever monetary policy hardens the rate regime, but are slow in passing on the benefit when the reverse happens. Although, they do offer sweet deals to new customers they acquire. So, a balance transfer is sure way to get a reduction in rates and reduce the monthly outflow towards loan repayment.

With new zero foreclosure regime, cost of switch has become zero and one can get additional money against the same property and / or basis the same Income. It is also a fantastic self-controlled debt restructuring tool as additional money raised can be utilized to close any short term unsecured outstanding such as personal loan or credit card dues.

Self-employed segment loves the balance transfer product as they can use the same for funding their business finance requirements as an alternative to working capital finance products. They unlock the equity in their property by raising additional money on the same through the transfer route. As soon as the property appreciates and they see an interest rate differential available in the market, they can transfer to the best rate lender and take a higher tenure to get as much top-up loan as possible. They can then use this additional money; given at a longer tenure to retire their short term and higher interest debts such as unsecured business loans.

Who should apply?
If the rate of interest of the existing loan can be reduced by at least 50 basis points (half percentage point) by doing a balance transfer, one can consider the option. For illustration – An INR 50 lakh home loan with tenure of 20 years will save Rs. 1668 in EMI and Rs. 4 lakh in interest outflow over the tenure, if switched from 10.5% to 10% rate of interest. The same loan saves Rs. 2657 in EMI if switched to 9.7% rate of interest and saving in interest outflow of INR 6.37 Lakh. As quite a few banks are offering 9.70 % as the home loan rate now.

There can be three possible objectives for a balance transfer – reducing EMI, reducing total interest outflow or raising additional money. EMI and interest outflow comparison should be done keeping the tenure constant in both the existing loan and the new loan by the prospective lender; as a higher tenure will save immediate outflow but will result in a higher interest outflow overall.

But in case of additional loan amount as the main consideration, a higher tenure in the new loan is always beneficial as it will result in lower EMI, higher income eligibility and hence maximum amount of top-up, additional loan.

Factors to consider
One should always assess the following:
• Tenure of the new Loan,
• Any additional conditions by the new lender,
• Fees charged by the new lender
• Any government charges, such as 0.2% stamp duty charges in maharashtra
• EMI Saving,
• Additional loan amount as top-up

A word of caution is that a balance transfer might not work if the remaining tenure of the loan is low as the new lender might offer a higher tenure and give you lower EMIs but a fresh loan has high interest outflow and so overall, it is going to be more expensive than the existing loan.

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