17 FEBRUARY, 2022

After meticulous research, Subodh availed a home loan a few years ago to buy his dream house. He was satisfied with the services and got a good deal on the interest rates. However, with the pandemic, the home loan interest rates dropped significantly, reducing the overall interest rates to an all-time low. He soon realized that he was paying much more EMI than his peers. Having researched well, he knew he could switch his lender. Unfortunately, when he went through the process, he had to pay more than his savings due to the various penalties and charges. 

 

A balance transfer can help you lower your interest rates and save money. However, you could have to pay some early payment charges and penalties too, which you must know about. Continue reading to know more. 

 

What is a home loan balance transfer?

A home loan balance transfer is a facility through which you can switch your lender. Through home loan refinance, you can close your home loan with your existing lender and avail a new loan with a different lender at better interest rates and terms. You can opt for balance transfer when,

  • You are paying high-interest rates
  • You are not satisfied with the services and facilities provided by the lender
  • You want to change the tenure
  • You want to avail top-up

 

The lender allows you to foreclose the loan and then apply for a new loan with another lender. However, you could have to pay some penalties or charges to transfer your loan.

 

Costs associated with balance transfer

 

  • Home loan transfer charges

When you transfer your loan, your existing lender charges you a transfer fee. Usually, these transfer charges include various other costs like administration fee, inspection fee, transfer cost, etc.

 

  • Prepayment charges

When you transfer your loan, the lender loses a customer and the interest of the remaining loan. Therefore, they charge you a prepayment fee that is based on the loan amount. Prepayment charges can be between 1-3% of the loan amount. These charges are for closing the loan before the end of the tenure.

 

  • Application charges

On switching the loan, the new lender considers the loan as a fresh application. Therefore, you need to pay the processing fee and all the costs associated with the fresh loan application.  

 

Should you opt for a balance transfer?

Considering the penalties and costs associated with the balance transfer, you might wonder if you should transfer the loan at all. It would be easy for you to decide if you consider certain factors.

 

What is the new interest rate?

There should be a significant difference in the housing loan interest rates. If there is hardly any difference, you could end up paying more than you save and so should not switch.

 

What is the total cost of the transfer?

Consider all the costs and penalties of the transfer and compare it with the savings. If the cost is more, it would be best to stick to the existing lender. You can use a home loan balance transfer calculator to do a cost-benefit analysis.

 

Usually, the balance transfer facility can help you save significantly on your home loan. However, if the cost and penalties of the transfer are high, it could prove to be a wrong decision. Therefore, you must consider all aspects before transferring.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.