Balancing the home loan effectively is one of the requirements for reducing your financial burden. Among all the strategies available for reducing the tenure of your home loan and saving on interest payments, the balance transfer of a home loan is the most effective. This financial tool allows borrowers to transfer their outstanding loan balance from one lender to another for better terms.
Let’s see how a balance transfer can help reduce the tenure of your home loan while ensuring maximum savings.
What is the meaning of home loan balance transfer?
A home loan balance transfer involves shifting the outstanding loan amount from your current lender to a new lender offering more favorable terms, such as a lower interest rate or reduced EMI. This process can lead to significant savings and enable faster loan repayment.
How can transferring your home loan balance help reduce your loan tenure?
If you are wondering why should you transfer your home loan balance, here are some compelling reasons:
- Lower interest rates mean faster repayment
When you choose a home loan balance transfer, the new lender may offer a lesser interest rate. This saving reduces your monthly EMI or helps you keep the EMI the same while reducing the loan tenure.
- Higher EMI option
After the balance transfer, you may pay a higher EMI amount against the reduced interest rate. As a larger portion of your EMI goes to the principal, the tenure shortens considerably.
- Prepayment and part-payment benefits
Most of the lenders permit prepayments without any extra charge after the balance transfer. The flexibility will allow you to make some extra payments toward the principal amount that will reduce the tenure further.
- Flexible loan restructuring
With a balance transfer, you stand the opportunity to restructure your home loan. You negotiate for a shorter term so that the loan is paid earlier.
- Saving against potential interest rate hikes
If your current home loan is floating, transferring it to a lender with either a fixed or lower floating interest rate can save you against any impending interest rate hikes that could occur in the future.
What are the factors to consider before transferring your home loan balance?
- Outstanding loan amount
Ensure that the remaining loan amount justifies the balance transfer cost. Transfers are more beneficial in the early stages of the loan when the outstanding principal is high.
- Loan tenure left
If only a few years are left on your loan, the balance transfer may not deliver substantial savings.
- Processing fees and charges
Take into consideration the transfer fees, administrative costs, and attorney charges. Compare these against savings that might be possible with a decision.
- Credit score and eligibility
A credit check is run by lenders during the process of transferring the balance. High credit score increases chances for approval as well as a better deal on loan terms.
- Loan terms and conditions
Be sure to read carefully all the terms and conditions included in the new loan agreement: prepayment charges, foreclosure clauses, and the type of interest calculation used.
What is the process of transferring a home loan balance?
- Research and compare lenders
Compare the various interest rates, fees, and services offered by the different lenders.
- Apply for a balance transfer
File an application to the new lender along with necessary documents, including income proof, ID, and property papers.
- Approval and sanction
The new lender will go through the application and allow the balance transfer if one meets all eligibility criteria.
- Closure of existing loan with present lender
Once approved, the new lender will pay out the balance to your existing lender. This will close the account of the original loan.
- Start repayment with the new lender
You can start repaying your loan with the new lender according to the agreed terms.
What are the benefits of reducing home loan tenure through balance transfer?
- Lower total interest payable: The lesser the loan tenure, the less interest is paid over the lifetime of the loan.
- Become debt-free sooner: Reducing the tenure helps you get debt-free earlier than predicted.
- Better financial planning: With a shorter tenure, you can allocate funds toward other investments or savings.
- Improved credit score: Timely repayments and early loan closure enhance your credit score.
- Reduced financial stress: Eliminating long-term debt reduces financial stress and promotes peace of mind.
When is a balance transfer not advisable?
While transferring your home loan balance is an excellent way to reduce your loan tenure and decrease your financial burden, there are some instances when this isn’t the most viable option:
- Near the end of loan tenure: If your loan is near completion, transferring might not be beneficial due to minimal savings.
- High transfer costs: In case the additional fees offset the benefit, then move back.
- Bad terms with the new lender: Refrain from banks with unclear terms, which will keep hidden charges coming. Anything that’s less friendly.
Other ways to reduce your home loan tenure
Although loan refinancing or home loan balance transfer is an excellent way to reduce home loan tenure, the option might not be viable in certain situations (explained above). In such cases, these are some other ways worth exploring to reduce home loan tenure:
- Make regular prepayments – Prepayments can be helpful in reducing your loan tenure and EMI. Whenever you have surplus funds, you can consider using them to make prepayments towards your home loan.
- Choose a step-up EMI plan – These plans are designed to align with your income growth and career progression. You can start with manageable EMI payments and accommodate higher EMIs as your income increases.
- Use tax benefits wisely – Often, home loans come with tax benefits on both principal and interest components. Make sure to understand and leverage these benefits effectively.
Concluding thoughts
A home loan balance transfer may be a strategic move to reduce the tenure of your home loan while saving on interest costs. However, it has to be evaluated very carefully in terms of loan terms, costs, and lender reputation. An informed decision will save you financial costs, repay the loan faster, and help achieve a debt-free future.
Also Read: Simple Strategies to Repay Home Loans Faster
