25 MAY, 2021

Vijay had always dreamt about purchasing a sea-facing home in Mumbai. After extensive research, he finally availed a home loan from a leading bank for a period of 30 years. After a few months, his colleague Amit took a home loan too. Amit had the same credit score, income and eligibility as that of Vijay. However, he got the home loan at a lower interest rate than Vijay. Vijay informed Amit about his high-interest rate to which Amit replied that he could opt to move the outstanding loan amount to a different lender offering a lower interest rate, also known as home loan balance transfer. When Vijay applied for a balance transfer, the lender asked him to pay a heavy processing fee, which instead of bringing down the overall cost of the loan would have increased it further.

You might be tempted to transfer your home loan if another lender offers a lower interest rate as compared to your existing lender. But transferring your home loan with a different lender is not always beneficial. You should consider various aspects before opting for a home loan balance transfer.  

What is Home Loan Balance Transfer?

With a home loan balance transfer, you can transfer your loan to a different lender if you get a lower interest rate or better terms on the loan. In balance transfer, the new lender repays your outstanding loan to the old or existing lender and you pay the remaining EMIs to the new lender.

Before you plan to switch your home loan there are certain factors you should consider:

  • Remaining tenure
    Experts suggest that you should transfer your loan when you have a longer tenure to repay. It is because you repay the major interest component in the initial years. Therefore, if you switch the loan at the end of the tenure, there will not be much interest to save.  
  • Cost of the transfer
    There could be various charges that the new lender levies on you for the transfer, like processing fee, legal fee, mortgage charges, etc. Considering these costs is essential to understand if the switch is a better option. If the charges and processing fee are high, it can increase your debt burden. In such a case, it might not be a good idea to transfer your loan.
  • Features and benefits
    If the new lender is offering better loan terms, like a reduction in tenure or a top-up loan, you can consider a home loan balance transfer. You can also switch if you want to change the interest rate from fixed to floating or vice versa. Loan transfer could be a favourable option if you are looking for better customer service and the new lender is providing that.

Should You Transfer the Loan?

While transferring a home loan, it is crucial to assess your savings and do a cost-benefit analysis to ensure that the transfer is beneficial. Calculate the total interest saving as compared to the cost of borrowing and then make a decision.

Just because you are getting a home loan at a lower interest rate does not always mean that it would benefit you. Transferring your loan should help you save money and not increase your cost of borrowing.

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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.