According to a recent study, delinquency rates in home loans rose noticeably by the end of September 2019. Such a rise in delinquency can be attributed to the high-interest rate on home loans coupled with a slow economy that has led borrowers to miss loan repayments, eventually creating a financial burden.
Therefore, existing home loan borrowers should consider ways such as loan refinancing to lower the interest rates on their home loan. Home loan refinancing is when you transfer the outstanding loan amount from your current lender to another lending institution offering loans at better interest rates along with favourable terms and conditions. It is also known as a home loan balance transfer.
When is the best time to opt for a home loan balance transfer?
Before you opt for a home loan refinance, you must, however, know the ideal time for refinancing your home loan to maximise the facility’s benefits.
- Home loan EMI is constituted of two components – the interest and the principal component. During the early years, the interest component is higher than the principal. On the other hand, during the later years, the principal component increases, reducing the interesting part.
Therefore, if you are opting for a loan balance transfer to reduce your home loan interest rate, the ideal time for refinancing is during the initial years of repayment period to reap the maximum benefits.
For instance, if a person A has availed a home loan with a tenor of 20 years is considering to opt for a home loan refinance, the best time to do it is when he or she has around 10 -15 years left on their loan tenor.
- You must opt to transfer your home loan only if there is a substantial difference between the interest that you are paying to your current lending institution and the new lender. You can use online tools like home loan balance transfer calculator to assess the amount you will save on refinancing.
To compound the amount, you need to enter the following details in it –
- Enter the name of your current lending institution
- The location of your property
- The month when your loan started
- The year when your loan started
- The total home loan amount sanctioned to you
- Existing loan repayment period
- Current home loan interest rates
- The interest rate offered by the new lender
After you submit the above information, the calculator will display the new loan amount you are eligible for, the amount you will be able to save and the top-up loan amount you qualify for. Accordingly, you can proceed to apply for a home loan transfer.
Important points to consider when opting for a home loan balance transfer
Furthermore, there are several points that you should consider before home loan refinance. These include –
- Negotiate with your current lending institution
Before you consider transferring your home loan to another lender, you should negotiate with your existing lender. Your current lender may be willing to review your request and reset your loan for better interest rates.
- Check your credit history
You must also be eligible to avail loan balance transfer facility. Hence, check the eligibility requirements set by the new lender before applying. Furthermore, a high credit score, along with clean credit history, with no record of defaulting in repayments is likeable. You should also keep in mind that defaulting on your home loan EMI can have other outcomes.
- Know the associated charges
You must familiarise yourself with the fees you need to pay to your lender while opting for a home loan balance transfer. Some financial institutions tend to charge a hefty penalty to borrowers as foreclosure fees. Furthermore, new lending institutions will also charge a specific amount as processing fee, application fee, etc.
These charges can add up and increase the overall cost of loan refinancing. You must carry out a cost-benefit analysis for these applicable charges before considering transferring your home loan balance.
Apart from the ones mentioned above, there are other things that you need to keep track of when you do a home loan balance transfer.
You can also consider opting for lending institutions that offer additional facilities such as a top-up loan for increased availability of funds.
Some such lenders also provide pre-approved offers for a hassle-free application procedure. Apart from home loans, these offers can also be availed on several other financial products like loans against property. To check your pre-approved offer, you only need to enter a few essential details like name and contact information.
You must also check the terms and conditions of your new lender before availing home loan balance transfer with them. It helps to make sure that you do not encounter any complications in loan repayment in the future.