Opt for a mortgage balance transfer? Know the factors to consider | Photo credit: BCCL
New Delhi: Nowadays, most lenders give home loans between 6.5% and 9% interest. These reductions have given mortgage borrowers the option of changing their outstanding loans to qualify for a lower interest rate. In an extremely competitive market, different lenders are offering different interest rates on home loans to borrowers due to many factors.
So, to ease the burden on mortgage payers, most banks have offered mortgage balance transfer, in which the borrower can reduce their existing equivalent monthly payments by transferring their outstanding loan amount from the current bank. to others. that offer lower interest rates.
In most cases, the primary goal behind choosing a home loan balance transfer is to reduce the overall interest cost on the outstanding home loan amount. The balance transfer option is especially useful for existing borrowers who initially took out the loan at a higher interest rate and are now eligible for a much lower rate due to their improved credit profiles. The lower interest rate used when exercising the Home Loan Balance Transfer (HLBT) results in a reduction in the overall interest payment on your existing home loan, without impacting your existing cash and investments.
Here are some other factors you should consider before switching to a mortgage lender:
1. Fees: Prepayment charges for the old loan, processing fees for the new loan, stamp duty charges (on the new mortgage document from the lender), legal / technical fees, etc. can add layers of additional costs that a borrower will have to incur during the mortgage balance transfer process. While it is undeniable that even a small reduction in interest rates can mean savings for the borrower, but if the additional costs outweigh the benefits of the lower interest rate, the goal of the home loan transfer is defeated. .
2. Duration of occupation: Changing loans is only beneficial if the loan term is long in order to make the risk-reward in its favor. For example, a borrower who has a loan of Rs 50.00,000 for a term of 15 years issued at 7.4% by a certain lender, gets it refinanced at 6.90%, or 50 bps less. They can save over Rs 2.5 lakh in total.
Criteria for changing lender:
Considering everything, it makes sense for a borrower to only change a home loan if there is a difference of at least 50 basis points between the new and old rates and the remaining term is at least 10 basis points. years or older. For loans with a remaining term of less than 10 years, the interest difference should be well over 50 basis points.
Simply put, the longer the remaining term of the loan, the greater the potential benefit from the interest savings. Keep in mind that if you switch to a lower mortgage rate, your IME interest component will decrease, meaning that the tax benefit eligible for the Section 24 interest deduction will also decrease.
When to change
There is no one idea that works for everyone. Ideally, calculations should be done on a case-by-case basis. Proper analysis of the cost differential and knowledge of any additional costs involved in addition to the interest rate differential is what will give a clear picture of whether or not to change.