Housing loan is a big ticket liability with a long repayment term. Goes without saying that even a minor decrease in the interest rate can lead to saving of large amount. The borrowers may be willing to balance transfer their existing loan to another housing finance company or a bank if they get a better deal. Taking advantage of this sentiment, many lending institutions reach out to the borrowers with better housing loan interest rates. But it may not always be wise enough to switch the lender and continuation of loan with existing one just might make more financial sense.
Following are the major factors that the borrower must consider in the process of evaluating the proposition and coming to a decision.
Pending term of loan
If one was to check the repayment schedule of his housing loan, he would realize that in the initial years majority of repayment gets adjusted towards the interest part. As the loan term matures, the proportion of principal repayment, as part of the EMI, increases. Broadly speaking, for a 20 year term loan, while one may think that the repayment of about 50% has been made on successfully paying the EMIs for 10 years, the principal repayment stands only at about 33%. If it was to be calculated for first five years, it would be about 13% only.
Given the above fact, it may not make much sense to balance transfer the loan at a later stage since the initial repayment of the new housing loan will also attract higher repayment of the interest which in turn will make the overall cost of the loan and expensive proposition.
Take over costs
One would also need to factor the processing costs that the new lender would be charging while calculating the overall efficacy of transfer. These costs generally get neglected. The fact remains that the borrower would have already picked up these costs at the time of disbursal of the current loan. One would be required to go through the terms of lending in detail to understand all the hidden or undisclosed costs. The low housing loan interest rate might just turn out to be an unappealing proposition post understanding the complete deal.
Loan interest – floating or fixed
This is another very important element that needs to be taken into account while evaluating the proposition of balance transfer. If the loan is already on floating rate of interest, meaning linked to the rates released by the Reserve Bank of India, then the rate of interest being charged to the borrowers will also reduce with the downward movement of the central bank rates.
In case the loan is on a fixed rate of interest, then it might be a better idea to take the plunge of shifting the loan. However, even in this situation, one should first try to negotiate with the current lending institution and try to get the loan terms changed.
Approved property by the housing finance company
One also needs to take into account the fact that not all housing finance companies lend for all properties. There might be a situation that the company may not fund the project, the area or the amount. So it is always advisable to check with the prospective lender on availability of loan on the property that one possesses.
Service Quality
Interest alone is not everything. When we consider a long term relationship with any institution, we do need to look into the service standards of the financer. End of the day, this is something as important as the cost. One may want to understand the turn around time and process of handing over the property papers post complete repayment in advance, apart from other service related processes before getting into a relationship.
Conclusion
While it does make financial sense to get the home loan taken over by another bank, it may not be the best thing to do for all. A careful assessment of all the components that may impact the over all cost and servicing of the new housing loan will be the prudent thing to do before getting this done.
