11 MAY, 2022

Higher home loan interest rates often make it difficult to service the Equated Monthly Instalments (EMIs) on time​. This is where a home loan balance transfer can help! Through the home loan refinance option, you can easily switch your existing home loan from your current lender to another lender at a lower interest rate to reduce your loan obligation. Lower EMI burden and interest cost ensure timely repayments, which may not have been possible earlier. Besides this, at the time of a balance transfer, few lenders may also provide you with a home loan top-up facility to meet your personal exigencies or monetary mismatches. Read on to know how you can make the most out of your home loan balance transfer deal.

Difference between existing and new home loan interest rate

The basic idea to avail the transfer option is to pay your remaining outstanding home loan balance at a lower interest rate. However, the question is how much difference should there be between the rates for you to consider the transfer? If you view the current home loan interest rates, you will see they have fallen to around 6.60% to 7% p.a. following the constant cuts in the repo rate by the Reserve Bank of India (RBI). So, interest rates currently are extremely affordable. But you can still conduct your research to select the best home loan interest rate for the transfer. Ideally, the difference between the existing and new interest rates must be at least 1%. Even if your new home loan interest rate is lower than the previous one by 0.50% - 0.75%, you can still save a lot if you are at the beginning of your loan repayment and have the majority of the tenure remaining.

For example, suppose you availed a home loan of Rs 45 lakh, five years ago at 8% p.a. for a repayment tenure of 20 years with an EMI of Rs 37,640 and overall interest outgo of Rs 45.34 lakh. Currently, you have an outstanding amount of nearly Rs 39.39 lakh with a loan repayment tenure of 15 years left. Now, if you avail the transfer option at home loan balance transfer interest rate of 7% p.a. f​or the remaining repayment tenure of 15 years, the EMI will come down to Rs 35,405 and your overall interest outgo will reduce to Rs 24.34 lakh. However, if you avail a higher repayment tenure of 25 years, while your EMI burden will further fall to Rs 27,840, your overall interest outgo will increase to Rs 44.13 lakh. Thus, as a higher repayment tenure results in higher overall interest outgo, you must try and prepay your loan with surplus funds in the future if you avail the transfer option just to lower your EMI burden.

Ending note

As the home loan balance transfer option is considered a new home loan application, your new lender will charge processing fees, administrative charges, etc., during loan processing. Hence, factor in the associated charges before you opt for the balance transfer option. For computing your overall savings in the interest component, use the home loan balance transfer EMI calculator. This calculator will help you know if the savings in the interest component outweigh your transfer cost. If they do, opt for the balance transfer option.

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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.