13 APRIL, 2022

Changes in monetary and economic policies are often reflected in the consumers’ finances and budgets. For example, with a hike in home loan interest rates, the interest outgo and total cost of borrowing increase for all borrowers. Lately, with the fluctuations in the home loan interest rates, borrowers have seen a hike in their interest obligation. Undoubtedly, a hike in interest rates also increases their overall burden of loan repayment.

Experts believe that borrowers can reduce their overall payable interest amount in two ways - home loan prepayment and home loan balance transfer. However, choosing between the two can be confusing and tricky. You need to study and understand the various aspects of both options to choose the right one for you.

 

Home loan repayment

As the name suggests, prepayment means early payment of your home loan obligations. When you pay a part or the entire loan amount before the due date, it's called prepayment. Prepayment is an effective means of paying your loan faster and reducing your interest outgo. For this, you need to pay an amount that is at least equal to or more than two months of Equated Monthly Installments (EMI). 

If you have a fixed interest rate home loan, you might have to pay prepayment charges.

 

Home loan balance transfer

A home loan balance is an effective way to reduce your home loan interest rates. If you find a lender offering a lower interest rate than you are already servicing, you can switch your home loan. In this facility, the new lender helps you repay the existing home loan. Once you close the old loan, you can pay the remaining loan EMI at low-interest rates. Apart from reduced interest rates, you can also enjoy better facilities and services by transferring the home loan.

 

Which one should you choose?

Your choice between a home loan balance transfer and prepayment would significantly depend on your financial profile and tenure of the loan. You can opt for prepayment if you have surplus funds at your disposal. However, you must ensure that prepaying does not affect your other goals and needs. Also, consider your investment needs. If you get better interest rates by investing the fund, prepayment might not be the best choice.

 

Similarly, before choosing a balance transfer, it is wise to ensure that you are eligible to transfer the loan, and will save a substantial amount. Also, you must opt for refinance in the initial years of the tenure to save on interest costs. If maximum loan tenure has passed, prepayment could be a better alternative as you would have paid a significant loan interest already.

 

You must weigh the cost and benefit of both options before deciding. When opting prepayment, you must have an emergency fund in place. Similarly, before you opt for a home loan balance transfer, you must talk to your existing lender to reduce the interest rates to save transfer expenses. Often, lenders tend to accommodate loan terms for existing customers.

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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.