How Home Loan Balance Transfer Can Save Money
Home Loan Balance Transfer: Owning a home is a dream for many people. It offers relief from the constant hassle of moving between rented properties. However, buying a home outright with cash is often unfeasible for most potential homeowners. To finance their purchase, they typically secure a loan from a bank, non-banking financial company (NBFC), or housing finance company. These home loans are usually long-term, resulting in substantial interest payments in addition to repaying the principal amount.
For instance, if you take a Rs 50 lakh loan for 20 years at an annual interest rate of 8.50 percent, the total interest paid over that period would be Rs 54,13,879, which significantly exceeds the principal by over Rs 4 lakh.
While it is impossible to completely avoid paying loan interest, there are effective strategies to reduce the interest burden. One of the most notable methods is through repayment.
Our research shows that by, “Transferring your home loan balance to a lender with a lower interest rate can substantially reduce your total interest payments. This involves shifting your outstanding loan amount to a new lender offering better terms, which can potentially lower your monthly EMIs or shorten the loan tenure. However, it is important to consider additional costs such as processing, administrative, and legal fees.”
How Home Loan Balance Transfer Works
- Evaluation: Assess your current loan terms, including the outstanding loan amount, interest rate, tenure, and EMI.
- Research: Look for lenders offering lower interest rates and better terms.
- Application: Apply for a balance transfer with the chosen lender, providing necessary documents like proof of income, identity, property documents, and existing loan details.
- Approval: The new lender evaluates your application and approves the balance transfer.
- Transfer: The new lender pays off the outstanding loan amount to the existing lender, and you start paying EMIs to the new lender.
How to Save You Over Rs 4 Lakh on a Rs 45 Lakh Loan
Imagine you have a Rs 45 lakh home loan with a 9% interest rate for a 20-year term. After paying the loan for 5 years, you receive an offer from a bank to transfer the remaining balance at an 8% interest rate. By taking this offer, you can benefit in two ways: you can either reduce your equated monthly installment (EMI) compared to your previous loan, or you can repay your home loan earlier by continuing to pay the same EMI as before, thus reducing your total prepayment amount.
How Home Loan Balance Transfer Can Save Money: Understanding the Benefits of a Balance Transfer
Let’s consider a detailed example to illustrate the benefits of a home loan balance transfer. Suppose you have a home loan balance of Rs 45 lakh at an interest rate of 9.5% with a remaining tenure of 15 years. Now, you get an offer from another lender to transfer your loan balance at an 8.5% interest rate.
Impact on Repayment Schedule and Total Interest Paid
Here’s how transferring your loan at a lower interest rate impacts your repayment schedule and total interest paid:
- Lower EMI: By transferring to a loan with a lower interest rate, your monthly EMI will reduce, easing your monthly financial burden.
- Reduced Total Interest: A lower interest rate means you will pay less interest over the remaining tenure of the loan, saving you a significant amount of money.
- Potential for Early Repayment: If you choose to continue paying the same EMI as your previous loan, you can repay your loan faster than initially planned, reducing the overall interest paid.
Typical Fees and Charges for a Balance Transfer
When you opt for a home loan balance transfer, several fees and charges may apply, including:
- Processing Fees: Charges by the new lender for processing your loan application.
- Administrative Charges: Fees for administrative tasks related to the transfer.
- Legal Fees: Costs associated with legal documentation and verification.
Lets analyze the scenario with above example:
Existing Loan:
- Principal Amount: Rs 45,00,000
- Interest Rate: 9.5% per annum
- Remaining Tenure: 15 years
- Monthly EMI: Rs 46,990.11
- Total Interest Paid: Rs 39,58,219.93
New Loan (After Balance Transfer at 8.5% Interest Rate):
- Principal Amount: Rs 45,00,000
- Interest Rate: 8.5% per annum
- Remaining Tenure: 15 years
- Monthly EMI: Rs 44,313.28
- Total Interest Paid: Rs 34,76,390.42
Savings:
- Total Savings in Interest: Rs 4,81,829.51
Comparison Table
| Details | Existing Loan (9.5% Interest) | New Loan (8.5% Interest) |
|---|---|---|
| Principal Amount (Rs) | 45,00,000 | 45,00,000 |
| Annual Interest Rate (%) | 9.5 | 8.5 |
| Remaining Tenure (Years) | 15 | 15 |
| Monthly EMI (Rs) | 46,990.11 | 44,313.28 |
| Total Interest Paid (Rs) | 39,58,219.93 | 34,76,390.42 |
| Total Amount Paid (Rs) | 84,58,219.93 | 79,76,390.42 |
| Total Savings in Interest (Rs) | – | 4,81,829.51 |
Explanation
- Principal Amount: The original loan amount, which remains the same for both scenarios.
- Annual Interest Rate: The percentage rate at which interest is charged annually.
- Remaining Tenure: The duration over which the loan is to be repaid.
- Monthly EMI: The Equated Monthly Installment to be paid each month.
- Total Interest Paid: The total interest paid over the loan tenure.
- Total Amount Paid: The sum of the principal amount and total interest paid.
- Total Savings in Interest: The difference in total interest paid between the existing loan and the new loan, indicating the savings achieved through the balance transfer.
Conclusion
Switching your home loan to another lender with a lower interest rate can help you save money over the long term. Carefully evaluate the fees and charges involved to ensure the overall benefit outweighs the costs. With strategic planning, a home loan balance transfer can be a financially savvy move to reduce your loan burden and achieve your financial goals faster.
Before proceeding with a balance transfer, it is advisable to consult with both your current lender and the prospective lender to fully understand the financial implications involved. This may include but is not limited to fees, interest rates, terms, and potential impacts on your credit score. The information provided is for general informational purposes only and should not be considered as financial advice. You should conduct your own research and seek professional guidance tailored to your specific circumstances before making any financial decisions. We do not assume any responsibility or liability for the accuracy, completeness, or reliability of the information provided herein.